Does Texas have an inheritance or estate tax? On a state level, Texas is one of 38 states that does not impose an estate tax or death tax and as of 2015, Texas no longer collects inheritance tax. However, residents are still subject to federal estate tax, and it is recommended to look into estate tax planning to protect your assets.
The federal estate tax is an excise tax levied on the transfer of a person’s assets after death. Although commonly known as the death tax, it is neither death nor an inheritance tax, but more accurately a transfer tax. There are three aspects of federal wealth transfer taxes that comprise what is called the Unified Transfer Tax: Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes. Legal planning to avoid or minimize these transfer taxes is both a prudent and an important aspect of comprehensive estate planning. Constantly changing federal tax laws can be difficult to navigate, connect with an experienced, professional attorney at Robbins Estate Law for expert assistance in your estate tax planning.
In the Tax Cuts and Jobs Act of 2017 (TCJA 2017), President Trump signed the most recent iteration of the federal estate, gift, and generation-skipping transfer tax into law. There are a few things you ought to know about this law which took effect on January 1, 2018. Specifically, you should know the “numbers” governing transfers subject to estate, gift, and generation-skipping transfer taxation.
Federal Estate Tax Exemption
As of December 17, 2010, a $5 million exemption, as indexed for inflation, was signed into law under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (TRA 2010). By 2017, the federal estate tax exemption had adjusted to $5.49 million per individual due to inflation (and a nearly “automatic”* $10.98 million for married couples who follow very specific requirements at the death of the first spouse).
In December 22, 2017, President Donald Trump increased this exemption to $11,200,000 per individual (and $22,400,000 for married couples). The tax rate for amounts above what can be exempted remains at 40%.
This exemption will be upheld until 2025, at which point the exemption will return to the previous $5 million cap. Following the reduction in exemption amount, there will also be an increase in the maximum gift and estate tax rate. Growing from 40% to 45% in 2026.
*See “Portability” below for more on this.
Lifetime Gift Tax Exemption and Annual Gift Tax Exclusion
The TCJA 2017 is a unified exemption that ties together the gift tax and the estate tax. Meaning that, as you utilize your lifetime gift tax exemption while living, your federal estate tax exemption at death will be reduced accordingly. Your unified lifetime gift and estate tax exemption in 2017 was $5.49 million and are now the same as the federal estate tax exemption of $11,200,000 per individual (and $22,400,000 for married couples). Likewise, the top tax rate is 40%. Note: Gifts made within your annual gift exclusion amount do not count against your unified lifetime gift and estate tax exemption.
So, how much is this annual gift exclusion?
The annual gift exclusion has increased to $15,000 due to its inflation adjustment. This is up from $14,000 in 2017. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $30,000 to as many individuals as they choose each year, whether both spouses contribute equally, or if the entire gift comes from one spouse. In the latter instance, the couple must file an IRS Form 709 Gift Tax return and elect “gift-splitting” for the tax year in which such a gift was made.
Generation-Skipping Transfer Tax Exemption
GSTT or generation-skipping transfer tax exemption is a transfer tax on property passing from one generation to another generation that is two or more generational levels below the transferring generation. For example, a transfer from a grandparent to a grandchild or from an individual to another unrelated individual who is more than 37.5 years younger than the transferor.
Properly done, this can transfer significant wealth between generations.
The amount that can escape federal estate taxation between generations, otherwise known as the Generation-Skipping Transfer Tax Exemption (GSTT) is unified with the federal estate tax exemption and the lifetime gift tax exemption at $11,200,000 per individual (and $22,400,000 for married couples, subject to certain specific requirements). As with estate and gift taxes, the top GSTT tax rate is 40%.
Of American Taxpayer Relief Act of 2012 (ATRA 2012), made “permanent” a new concept, called “portability,” which means a surviving spouse can essentially inherit the estate tax exemption of the deceased spouse without the use of “A-B Trust” planning or traditional estate tax planning. As with most tax laws, however, the devil is in the details. For example, unless the surviving spouse files a timely (within nine months of death) Form 709 Estate Tax Return and complies with other requirements, the portability may be unavailable.
Married couples will not be able to use the GSTT exemptions of both spouses if they elect to use “portability” as the means to secure their respective estate tax exemptions. Furthermore, reliance on “portability” in the context of blended families may result in unintentional disinheritances and other unpleasant consequences.
If you are concerned about how your current estate and gift planning may function in light of ATRA 2012, and thereafter, then we encourage you to schedule a consultation.
Inheritance Law, Will & Trust Planning in Texas
In addition to tax minimization, you want to be sure that you have a plan for the distribution of your assets in the case of your passing.
Passing away without a will or estate plan leaves the distribution of your assets to the state of Texas inheritance laws.
Work with an experienced estate planning attorney at Robbins Estate Law to ensure that you have a strong will and that you have control over the disbursement of your assets.
Estate, Inheritance, Death, & Gift Taxes in Texas Overview
Texas’s estate tax system is commonly referred to as a “pick up” tax. This is because Texas picks up all or a portion of the credit for state death taxes allowed on the federal estate tax return (federal form 706 or 706NA). Since there is no longer a federal credit for state estate taxes on the federal estate tax return, there is no longer basis for the Texas estate tax. Texas has neither an estate – a tax paid by the estate, nor an inheritance tax – a tax paid by a recipient of a gift from an estate also known as death taxes. Texas also does not have a gift tax at the state level, so residents only need to concern themselves with federal-level gift taxes and exemptions.
Why Robbins Estate Law?
Navigate ever-changing federal tax laws and complicated planning with experienced estate tax planning attorneys centered in the Austin area, serving all of Texas. Robbins Estate Law is ready– contact our Austin or Cedar Park locations today!