Texas has recently seen a surge in migration. With this comes questions regarding taxes. For example, does Texas have an estate tax?
In this post, we plan on tackling some of the Texas estate tax issues and questions that we encounter on a daily basis. So let’s dive in.
Table of contents
Texas estate tax
The good news is that Texas does not have an estate tax. Therefore, there is no estate limit, exemption, or tax rates to be concerned about.
But don’t forget about federal estate taxes. The rates will start around 40%, but there is recent discussions about increasing that rate and also decreasing the exemption.
How does the federal state tax work?
In theory, it is very simple. When a person passes away, you would consider their gross assets and then make deductions for debts and loans. You can reduce the estate even further through administrative and other funeral related costs.
The net amount is an applied to the annual exemption level. If you exceed this amount, you must file an estate tax return and pay any assessed tax.
However, very few estates will pay estate tax. Typically only about 1% of the estates have net assets that exceed the applicable exemption. So this shouldn’t be a problem for most taxpayers.
But in the current political climate, we see increased discussions around estate taxes. It would not be surprising if rates increased in future years. We might also see states impose additional taxes at the estate level.
But as of now there is no estate tax in Texas which is great news for people arriving from other high tax states.
Texas gift tax and inheritance
Texas also does not impose a gift tax or an inheritance tax. So there is no filing requirement when a gift is made. In addition, Texas will not impose inheritance related taxes for beneficiaries of Texas estates. It also does not impose tax for Texas residents that inherit assets that are domiciled in other states. But that doesn’t mean that those assets won’t be taxed in other states.
How to Avoid the Texas Estate Tax
Because Texas does not have an estate tax, you are in great shape. But the federal estate tax could still trip you up. Below are some strategies that you can use lower any estate tax liability. Make sure you review the following:
- Family Limited Partnerships (FLPs)
- Charitable Remainder Trusts (CRUT)
- Minor Trusts
- Grantor Retained Income Trusts (GRIT)
- Gifts Below Annual Exemption
- Qualified Terminable Interest Property (QTIP)
- Qualified Personal Residence Trusts (QPRTs)
- Grantor Retained Annuity Trusts (GRATs)
- Crummey Trusts
- Special Valuation of Farms and Businesses
- Dynasty Trusts
- Charitable Gift Annuity
- Grantor Retained Unitrusts (GRUTs)
- 529 Plans
- Intentionally Defective Grantor Trust (IDGT)
- Donor-Advised Funds
- Irrevocable Life Insurance Trust (ILIT)
- Direct Medical and Tuition Payments
People who should consider planning
There are many people who should be especially concerned about estate planning. Most people don’t realize that retirement accounts (including IRAs and 401ks) along with life insurance proceeds must be included in an estate.
As such, anybody who has the following circumstances should consider planning strategies:
- People with life insurance policies of at least $1 million
- People who stand to receive a large inheritance
- Business owners and entrepreneurs
- CPAs, engineers, IT professionals
- Consultants with high earning potential
- Medical and healthcare professionals
- Retirement accounts in excess of $1 million
- People with multiple rental properties
- Partners in passive activities
Texas is a very low tax climate. It has no state income tax, no estate tax, no inheritance tax, and no gift tax.
But it does have rather high property taxes. Texas has historically made a lot of money from levees on oil and gas, which is kept overall taxes on the low side. But certainly the higher property taxes need to be considered for anybody considering a move to the state.
If you think you might have a state tax issues, make sure you talk to a qualified CPA and or estate attorney. There are many planning opportunities that can be implemented before you are faced with a large tax bill.