Writing a will is helpful for family members at an emotionally challenging time. Choosing beneficiaries and designating their assets is a major focus of estate planning. However, one issue that sometimes catches beneficiaries by surprise is the unexpected costs associated with assets the beneficiary may receive. Particularly concerning is the potential for inheritance and estate taxes on those assets.
Definition of Inheritance Tax
Sometimes called a death tax, it a levy applied to any assets transferred to a beneficiary at the time of the decedent’s death. The only person excluded from these taxes is the spouse of the decedent. Inheritance taxes are collected at the federal level and sometimes at the state level, depending on the state. The tax is determined separately for each beneficiary, who is then responsible for paying any inheritance taxes.
Fortunately, Texas is one of the 33 states that does not have an inheritance tax.
Definition of Estate Tax
An estate tax is similar to an inheritance tax in that both are imposed on the assets from the decedent’s estate. One key difference is that the executor of the estate files the estate tax return based on the total value of the decedent’s assets. Any estate taxes are paid out of the estate’s funds before distribution of those assets.
Fortunately, Texas is one of the 39 states that does not have an estate tax.
Before breathing too big a sigh of relief, Texan beneficiaries need to be aware that although Texas has no inheritance tax, assets may still be subject to state inheritance taxes. For example, a resident of Texas may have to pay an inheritance or estate tax if the inheritance originates in one of the states that does have either an inheritance tax, such as Kentucky, or an estate tax, such as Connecticut. A Texan who inherits property from Maryland will have to pay both an inheritance tax and an estate tax since that state requires both.
Since state taxation laws are separate from federal taxation laws, another important consideration for Texans is federal estate taxes. While smaller estates are not affected by federal estate taxes, any estate of a single person with a value over 11.7 million dollars must pay a federal estate tax before the transfer of any assets to the estate’s beneficiaries. For married couples, the estate tax threshold is doubled, which means that no taxes would be owed on an estate valued at less than $23.4 million.
If the estate is based entirely in Texas and is worth less than the above-mentioned thresholds, Texans will not pay inheritance taxes or estate taxes. In fact, state, income, property, or capital gains taxes are not assessed for monetary inheritance in Texas.
Estate planning is a gift to family members and ensures that assets are divided as the decedent intends. An important aspect of that planning is being informed of and providing for potential taxes levied against an estate. Working with an experienced probate attorney ensures that family members are not surprised by unexpected taxes on their inheritance.
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