Estate taxes, also known as inheritance or death taxes, are levied on the transfer of property from a deceased person to their heirs or beneficiaries. These taxes are typically imposed on the net value of the deceased person’s estate, including all of their assets, including cash, real estate, investments, and personal property, minus any outstanding debts or liabilities. Depending on the jurisdiction, estate taxes are usually imposed by the federal government, state government, or both. In the United States, the Internal Revenue Service (IRS) imposes the federal estate tax, while some states also have their own estate or inheritance taxes.
Although Texas does not have its own estate tax, estates in the state may still be subject to federal estate tax. The federal estate tax is a tax on property transfer upon the owner’s death. It is calculated based on the estate’s value at the owner’s death. While it is not legally required to hire a lawyer when handling estate taxes in Texas, it is highly recommended. Estate tax laws can be complex, and the consequences of making errors or omissions in the estate planning process can be costly.
What Is the Purpose of Estate Taxes?
As mentioned, estate taxes are also called inheritance taxes, which are taxes imposed on the transfer of property from a deceased person to their heirs or beneficiaries. The primary purpose of estate taxes is to generate government revenue and help promote economic equality by redistributing wealth. The idea is that by imposing taxes on large estates, the government can help prevent the concentration of wealth in the hands of a few individuals and promote a more equal distribution of resources across society.
From a revenue standpoint, estate taxes provide a source of income for the government. This revenue can fund various government programs and services, such as education, infrastructure, and social welfare. From an equity standpoint, estate taxes help reduce wealth inequality by preventing wealth accumulation across generations. Estate taxes are designed to ensure that the wealthiest individuals do not pass on their entire estates to their heirs tax-free, allowing wealth to accumulate in the hands of a few families over time. Instead, estate taxes are intended to encourage the distribution of wealth more evenly across society by reducing the amount of wealth that can be passed on tax-free.
Estate taxes also serve as a tool for encouraging charitable giving. The estate tax provides a tax incentive for individuals to make charitable donations by allowing them to deduct the value of charitable contributions from their taxable estate. This can encourage individuals to give back to their communities and support charitable causes that are important to them. Overall, the purpose of estate taxes is to generate revenue for the government, promote equity in the distribution of wealth, and encourage charitable giving. However, estate taxes can be complex, and there is ongoing debate about their effectiveness and fairness.
How are Estate Taxes Calculated in Texas?
| Estate Value | Applicable Exemption | Taxable Estate | Federal Estate Tax Rate | Federal Estate Tax Due |
| $1,000,000 | $11,700,000 | $0 | 0% | $0 |
| $5,000,000 | $11,700,000 | $0 | 0% | $0 |
| $11,700,000 | $11,700,000 | $0 | 0% | $0 |
| $13,000,000 | $11,700,000 | $1,300,000 | 18% | $234,000 |
| $15,000,000 | $11,700,000 | $3,300,000 | 28% | $924,000 |
| $20,000,000 | $11,700,000 | $8,300,000 | 37% | $3,071,000 |
| $25,000,000 | $11,700,000 | $13,300,000 | 40% | $5,132,000 |
Note that the applicable exemption amount is subject to change and is adjusted annually for inflation. This table assumes the exemption amount of $11.7 million in 2021. The taxable estate is calculated by subtracting the applicable exemption amount from the estate value. The federal estate tax rate is applied to the taxable estate, and the resulting federal estate tax due is calculated. It’s important to remember that estate tax laws can be complex, so it’s advisable to consult with a qualified estate planning attorney and tax professional to ensure that you fully understand your estate tax obligations and how to minimize them.
How To Minimize Estate Taxes in Texas
Minimizing estate taxes in Texas requires careful planning, and there are several strategies you can use to reduce your estate tax liability. Here are a few of them:
Understand the Federal Estate Tax
The federal estate tax applies to estates that exceed a certain value. In 2021, the exemption amount for the federal estate tax is $11.7 million per individual. You won’t have to pay federal estate tax if your estate’s value is less than $11.7 million. If your estate is valued above this amount, you will owe estate tax on the excess amount.
Take Advantage of Lifetime Gifting
One way to reduce your estate tax liability in Texas is to give gifts to your heirs during your lifetime. You can gift up to $15,000 per year per recipient without incurring gift taxes. This means you can gift up to $15,000 to each without triggering gift taxes if you have multiple heirs. Gifting assets during your lifetime reduces the value of your estate, which can lower your estate tax liability.
Create a Trust
Another way to minimize estate taxes in Texas is to create a trust. A trust is a legal entity that holds assets for the benefit of a beneficiary. There are several types of trusts, including revocable trusts, irrevocable trusts, and charitable trusts. Each type of trust has its own set of rules and benefits, but all can be used to minimize estate taxes.
For example, an irrevocable trust can remove assets from your estate, reducing your tax liability. When you transfer assets to an irrevocable trust, you are no longer the owner of those assets. This means they are not subject to estate taxes when you die. However, it’s important to note that you cannot return assets once you transfer them to an irrevocable trust.
Use the Lifetime Exemption
The lifetime exemption is the money an individual can pass on to their heirs without incurring taxes. The lifetime exemption is currently $11.7 million per individual or $23.4 million per married couple. If your estate is worth less than the lifetime exemption amount, your heirs won’t have to pay estate taxes.
Make Charitable Contributions
Charitable contributions are another way to minimize estate taxes in Texas. If you leave a portion of your estate to a qualified charity, the value of your estate will be reduced. This can lower your estate tax liability. Additionally, charitable giving can provide other tax benefits, such as income tax deductions.
Purchase Life Insurance
Life insurance can also be used to minimize your estate tax in Texas. By purchasing a life insurance policy and making your estate beneficiary, the policy proceeds can be used to pay estate taxes. This reduces the burden on your heirs.
Working with an estate planning attorney is important to determine the best strategies for your situation. By implementing these strategies, you can reduce your estate tax liability and ensure your assets are passed on.
