5 Smart Ways to Plan For Estate and Inheritance Taxes

Aug 23, 2021Estate Planning

Leslie Thomas, Attorney

1. Learn the basics. You’ve already taken the first step in learning the difference between estate tax and inheritance tax – doing the research to see just how they might impact you and the loved ones you leave behind.

Here is the difference between the two. Estate taxes are levied on your assets at the time of your death. This is why it is also referred to by some as the “death tax.” Inheritance taxes are paid by your heirs based on the assets you leave them.

The federal estate tax exemption rings in at a whopping $11.7 million per person for 2021 (double for married couples!) and the IRS does not collect inheritance taxes so most Americans won’t ever be liable for these expenses.

Further, at the state level, Texas is one of the many states with no estate or inheritance tax. So while you may be concerned, this isn’t likely a problem you’ll ever run into.

2. Hire a professional.  If you’re considering how estate tax or inheritance tax might impact the people you care about, you are well ahead of the curve. In fact, many Americans never take the critical step of hiring an estate planning attorney or CPA to evaluate their own unique situation and prepare a will. That said, we suggest you avoid the temptation of DIY wills you can find through online legal services, as they often fail to account for the specific details of your situation.

No matter the size of your estate, this simple step can protect the people you love from costly legal fees, drawn-out court hearings and a lot of unnecessary stress. A solid estate plan will go a long way in helping all parties involved.

And the truth is, estate and inheritance tax law changes all the time and varies greatly from state to state. An experienced Texas estate planning attorney or CPA can look closely at your assets and plans to determine what, if any, tax implications may apply.

For example, while Texas has no inheritance tax, many states do and impose those taxes on a resident decedent who lives or owns property there. So if one of your beneficiaries lives in Iowa, Kentucky, or one of the four other states with their own inheritance taxes, different laws will apply. This is why your estate plan should take into account each beneficiary within its design.

When it comes to a will or a trust, plan to reassess as your situation changes. Marriage, divorce, births, and deaths of members of your family, the purchase of property, retirement, and relocation are just some of the major life events that may impact how you plan to disperse your assets – and how they might be taxed. There are different types of trusts, so you should get a customized opinion for your specific situation.

3. Be generous when you can. If your goal is ultimately to reduce the size of your estate to avoid paying federal estate taxes, you can start sharing those assets with each beneficiary now in the form of tax-free gifts. If you know your money will be subject to a big tax bill if left as is you can begin dispersing it now.

Annual gifts to individuals of up to $15,000 are exempt from gift tax, and gifts to your surviving spouse of any amount are always without tax implications. Additionally, you can always pay for someone’s college or medical bills without those payments being subject to security by the IRS or the state of Texas.

Your giving doesn’t have to stop there. Charitable organizations and causes that have a tax-free status cannot alone help you reduce the overall size of your estate. However, they can provide you with a tax deduction while doing something good for a cause you care about! (Be sure to check with your CPA to understand income thresholds and your individual tax rate.)

4. Beware of income taxes and capital gains. While you may be free from estate tax and the inheritance tax here in Texas, your beneficiaries could still be subject to income taxes, capital gains, and other expenses. As previously stated, your best bet is to consult with an estate planning attorney or even a tax professional to know exactly what you can expect and how to prepare for it.

One of the most common financial impacts of distributed assets comes when a loved one inherits a retirement account that inadvertently leads to a high income tax bill, especially during their most productive earning years when they have a high tax rate. Start planning with your financial advisor today so you can convert your accounts into the appropriate types of retirement funds to keep your money in your family to reduce their tax burden.

5. Establish a trust. At the end of the day, the best way to protect your assets and provide cover from probate is to put them into a revocable or irrevocable trust. While a trust may not completely guard your assets against being subject to various taxes, it can offer a multitude of other benefits and help reduce tax liability. There are many different types of trusts and an estate planning attorney can help determine what will be just right for you.

Understanding the Difference Between Estate Tax and Inheritance Tax

We hope this brief article helped you begin to understand how to evaluate your wealth planning goals. We work with clients every day to help them devise specific strategies in light of their questions and concerns, which often include topics like capital gains tax, calculating their taxable estate, and other matters concerning wealth transfers for their heirs.

If you would like to schedule a complimentary phone consultation, please get in touch today. Ask about how you can gain access to our “lifetime lawyer” program.

We are here to help you with all of your estate planning needs.


Thomas Walters Top Estate Planner