Estate planning is a critical step in securing your family’s financial future. For Texas residents, understanding the tax implications of estate planning helps you maximize the value of an estate and reduce the potential burden on heirs. Although Texas offers some favorable tax advantages, there are still key considerations when it comes to federal taxes. This article will guide you through the tax issues relevant to estate planning in Texas.

No State Estate Tax in Texas

One of the most significant advantages for Texas residents is the absence of both a state estate tax and an inheritance tax. In Texas, individuals are not required to pay taxes on the transfer of their estate or assets upon their death. States like New York, California, or Illinois, for example, have their own estate and inheritance taxes, which substantially reduce the amount of wealth passed on to heirs.

For high-net-worth individuals, this lack of state-level taxation in Texas is especially advantageous. It allows them to retain a larger portion of their assets, which is then transferred directly to their beneficiaries. This is a substantial benefit for those looking to preserve their wealth across generations, as it minimizes the tax burden on their estate and maximizes the amount available for their loved ones.

Without the pressure of state estate or inheritance taxes, Texans also have more flexibility in their estate planning strategies. There are more opportunities to invest in trusts, charitable giving, or other financial instruments that benefit heirs without the concern of state-imposed deductions.

Federal Estate and Gift Taxes

While Texas doesn’t impose an estate tax, the federal government does. In 2024, the federal estate tax exemption is $12.92 million per individual or $25.84 million for a married couple. Estates valued below these thresholds are not subject to federal estate tax. However, if your estate exceeds these amounts, the excess could be taxed at a rate of up to 40%.

It’s important to note that the estate tax exemption is scheduled to decrease in 2026 to around $6 million per individual, unless Congress takes action to extend the higher exemption levels. This potential change highlights the importance of reviewing your estate plan regularly.

The Importance of the Gift Tax in Estate Planning

The federal gift tax is another important factor in estate planning. In 2024, you can give up to $17,000 per person per year without incurring gift tax or affecting your lifetime estate tax exemption. This strategy, known as annual exclusion gifting, is an effective way to reduce the size of your taxable estate over time.

Lifetime gifts exceeding the annual exclusion will count against your lifetime estate tax exemption. Strategic gifting plays a crucial role in minimizing the estate tax burden for your heirs, especially if your estate is likely to exceed the federal exemption limits.

The Step-Up in Basis and Capital Gains Tax

For Texas residents, understanding the step-up in basis is essential when planning for potential capital gains taxes. When a beneficiary inherits property, they receive a “stepped-up” cost basis, which is typically the fair market value of the property at the time of the original owner’s death. This step-up significantly reduces the capital gains tax burden if the beneficiary later sells the property.

For example, if you purchased a property for $100,000 and it is worth $500,000 at the time of your death, your beneficiary’s basis is “stepped up” to $500,000. If they sell the property shortly after inheriting it, they may owe little or no capital gains tax.

Marital Deductions and Portability

Texas is a community property state, which offers additional advantages for married couples. Under federal law, all assets left to a spouse are exempt from estate tax due to the unlimited marital deduction.

Additionally, portability allows a surviving spouse to use any unused portion of the deceased spouse’s estate tax exemption. Properly structuring your estate to take advantage of these benefits helps to preserve wealth across generations.

Planning for the Future: Trusts and Other Tax Strategies

Trusts are highly versatile financial tools that offer significant advantages in managing and reducing tax liabilities, especially for high-net-worth individuals. Among the various types of trusts, irrevocable trusts—such as bypass trusts, charitable remainder trusts (CRTs), and grantor retained annuity trusts (GRATs)—are particularly effective in minimizing estate taxes.

A bypass trust, for example, helps in reducing estate taxes by allowing assets to bypass the estate of the surviving spouse and directly pass to beneficiaries, effectively utilizing the estate tax exemption of both spouses. Charitable remainder trusts provide a dual benefit: they allow individuals to donate assets to a charity while retaining an income stream for themselves or their heirs, and they offer significant tax deductions.

Meanwhile, grantor retained annuity trusts (GRATs) enable individuals to transfer wealth to heirs while retaining an annuity payment for a specified term, potentially reducing the value of the gift for tax purposes.

These trusts can be customized to align with specific financial goals, whether it’s preserving wealth, supporting charitable organizations, or ensuring that assets are passed on with minimized tax implications. By strategically employing these trusts, individuals can effectively manage their estate plans to optimize tax efficiency and achieve their financial objectives.

Staying Current on Tax Implications

Tax laws are inherently dynamic and change over time, often influenced by shifts in federal policy and legislative actions. These changes have significant implications for estate planning, potentially altering how assets are taxed upon transfer and affecting overall estate strategy. One key upcoming change to be mindful of is the anticipated reduction in the federal estate tax exemption, scheduled to take effect in 2026.

Currently, the federal estate tax exemption allows individuals to pass a substantial amount of assets free from federal estate taxes. However, the exemption is set to decrease significantly, which could impact many estate plans by reducing the amount that can be transferred tax-free. Given these uncertainties and potential shifts in tax regulations, it is important to stay proactive in your estate planning efforts.

CONSULT WITH AN ESTATE PLANNING ATTORNEY

For Texas residents, estate planning provides significant opportunities to preserve wealth and protect assets from unnecessary tax liabilities. While Texas does not have an estate or inheritance tax, federal taxes remain a crucial consideration. With careful planning and the right strategies, you can ensure that more of your estate passes to your loved ones instead of being lost to taxes. If you need assistance navigating the complexities of estate planning and tax strategies, reach out for a consultation today. I can help you develop a comprehensive plan tailored to your unique circumstances.

Bromlow Law, PLLC and Laura L. Bromlow, are dedicated to the practice of Elder Law and Estate Planning. Our practice focuses solely on working with clients in these and closely related legal fields. Laura L. Bromlow is a Certified Elder Law Attorney with the National Elder Law Foundation. Bromlow Law, PLLC strives to enhance communication among family members and loved ones and to keep them all out of conflict so they can stay out of court. We want to help you keep your close circle safe!

Please contact our office today at (281) 665-3807 to schedule a free consultation to discuss your legal matters. We look forward to the opportunity to work with you.