Estate Tax Planning in Houston, Texas

Historically speaking, the federal estate tax is an excise tax levied on the transfer of a person’s assets after death. In actuality, it is neither a death tax nor an inheritance tax, but more accurately a transfer tax. There are three distinct aspects to federal wealth transfer taxes that comprise what is called the Unified Transfer Tax: 1) Estate Taxes, 2) Gift Taxes, and 3) Generation-Skipping Transfer Taxes. Legal planning with estate planning attorneys at The Galligan Law Firm to avoid or minimize these transfer taxes is both a prudent and an important aspect of comprehensive estate planning.

The most recent iteration of the federal estate, gift, and generation-skipping transfer tax was signed into law on December 22, 2017.  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

The Federal Estate Tax Exemption for 2023 is $12.92 million per individual and $25.84 million for married couples who follow very specific requirements at the death of the first spouse. The tax rate for amounts above what can be exempted remains at 40%. See “Portability” below for more on how married couples can use both spouses’ exemptions.

Lifetime Gift Tax Exemption and Annual Gift Tax Exclusion

To understand how the federal estate tax and the federal gift tax works, you need to be aware that they are based on the concept of a unified exemption that ties together the gift tax and the estate tax. This means that, to the extent 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 2023 is $12.92 million ($25.84 million for married couples if certain requirements are met) which is the same as the federal estate tax exemption. 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 increases periodically due to its inflation adjustment. The annual gift exclusion amount for 2023 is $17,000 per person. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $34,000 to as many individuals as they choose each year, whether both spouses contribute equally, or if the entire gift comes from one spouse. In some circumstances a married couple may have to file an IRS Form 706 Gift Tax return and elect “gift-splitting” for the tax year in which such gift was made.

Generation-Skipping Transfer Tax Exemption

So, what is this GSTT? Basically, it 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 instance, 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 $12.92 million per individual in 2023 (and $25.84 million for married couples, subject to certain specific requirements). As with estate and gift taxes, the top GSTT tax rate is 40%.

*“Portability”

The American Taxpayer Relief Act of 2012 (ATRA 2012), made “permanent” a new concept in estate planning for married couples. This concept, called “portability,” means that a surviving spouse can essentially inherit the estate tax exemption of the deceased spouse without use of a complicated trust. 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.

In addition, 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 and of these tax law changes, then we encourage you to schedule a consultation.

Texas Estate Taxes

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 tax – a tax paid by the estate, nor an inheritance tax – a tax paid by a recipient of a gift from an estate.