Houser Firm

Do Texas residents need to worry about paying an estate tax?

On Behalf of | Jan 30, 2024 | Estate Planning

Texas has numerous wealthy residents who own valuable property or run successful businesses. These residents may live in Texas specifically because of the state’s favorable tax rules. Texas is quite friendly to high-income individuals and businesses in various industries.

Many people living in Texas might take for granted that they have protection from the most expensive taxes that people often pay. Unfortunately, there are still major tax obligations that can diminish the personal holdings of Texas residents. A Texas resident thinking about their legacy and fine-tuning an estate plan might operate under the misconception that they have protection from estate taxes. However, estate taxes can still be an expensive issue for the surviving loved ones of someone who dies in Texas.

Federal estate taxes are still a concern for Texas estates

Texas is one of the majority of states in the country that do not collect estate taxes. If someone dies in Texas, it does not matter how much their property is worth. The state does not demand a portion of their estate before it passes to their heirs or chosen beneficiaries.

Although state estate and inheritance taxes aren’t a concern, federal estate taxes are still a risk. If someone owns a business, experienced profound career success or purchased valuable real property, their estate could be worth enough to trigger federal estate taxes. As of 2024, any estate worth more than $13,610,000 may have to pay estate taxes.

The federal estate tax rate is progressive. The more the estate exceeds the exemption threshold, the higher the potential tax rate. Any estate worth a million dollars or more beyond the current threshold could be subject to a 40% federal estate tax. In other words, Uncle Sam could lay claim to two-fifths of the total value of someone’s estate without prior planning.

How can people limit estate taxes?

There are several ways for people to minimize estate tax obligations. Effective strategies might include making strategic gifts and charitable donations. Many Texas testators also decide to transfer certain valuable assets to trusts. Trusts not only protect assets from creditors and give testators more control over the use of inherited property, but they can also limit or eliminate estate tax obligations.

Planning to minimize posthumous tax responsibilities can help those with valuable personal property pass as much as possible to their loved ones.