February 03, 2025
When Does a Texas Estate Plan Need to Address Estate Taxes?
Since 1982, Villeda Law Group has been providing comprehensive and effective estate planning solutions throughout Texas. Our team of experienced attorneys understands the importance of creating a customized estate plan that reflects your unique goals and protects your loved ones.
Estate planning is an essential process to ensure that your assets are distributed according to your wishes after your passing. However, when it comes to higher-value estates, tax implications can significantly impact what your beneficiaries receive. When and why your Texas estate plan needs to address estate taxes is crucial for ensuring your legacy is preserved.
What Are Estate Taxes?
Estate taxes are levied on the transfer of an individual’s assets upon their death. While the federal government imposes an estate tax, Texas does not have a state-level estate tax or inheritance tax. This distinction makes Texas an attractive state for those looking to minimize tax liabilities on their estates. However, even without state estate taxes, federal estate taxes may apply to larger estates.
The federal estate tax exemption for 2024 is $13.92 million per individual. Estates valued above this threshold are subject to a progressive tax rate of up to 40%. For married couples, the exemption can effectively double to $27.84 million with proper planning, thanks to the portability provision. However, careful structuring of your estate plan is necessary to fully leverage these benefits.
When Does Your Estate Plan Need to Address Federal Estate Taxes?
Your estate plan needs to address federal estate taxes under the following situations:
- High-Value Estates Exceeding the Federal Exemption Limit: If the total value of your estate exceeds the federal exemption of $13.92 million (or $27.84 million for married couples), your beneficiaries may face substantial tax liabilities. This includes not only cash and real estate but also retirement accounts, business interests, and life insurance payouts. Proper planning can help reduce the taxable value of your estate and minimize the financial burden on your heirs.
- Business Ownership: Estates that include family businesses or closely held companies are particularly vulnerable to estate taxes. Without a plan to address these taxes, heirs may need to sell business assets to cover the tax bill. Strategies such as creating a Family Limited Partnership (FLP) or transferring shares through trusts can preserve the business while reducing estate tax liability.
- Significant Life Insurance Policies: Life insurance payouts are typically included in the taxable value of an estate if the policy owner retains ownership at the time of death. For high-net-worth individuals, this can push the estate above the federal exemption threshold. An Irrevocable Life Insurance Trust (ILIT) is a common solution to remove the policy’s value from the taxable estate.
- Anticipated Future Growth in Estate Value: If your estate is currently under the exemption limit but expected to grow significantly due to investments, real estate appreciation, or business success, proactive tax planning is essential. Establishing gifting strategies or irrevocable trusts early can lock in lower valuations and reduce future tax burdens.
Engaging with a skilled estate planning attorney is essential for estates near the exemption threshold. The Villeda Law Group, a trusted name in McAllen for their estate planning services, offers comprehensive strategies to minimize estate tax burdens while protecting your family’s financial future. To protect your wealth and ensure the majority of your estate passes to your beneficiaries, there are several strategies you can employ:
- Lifetime Gifting The IRS allows individuals to give up to $17,000 per recipient annually without triggering gift taxes. Over time, this can significantly reduce the taxable value of your estate.
- Irrevocable Trusts Irrevocable trusts, such as a Grantor Retained Annuity Trust (GRAT) or an Irrevocable Life Insurance Trust (ILIT), can remove assets from your taxable estate while retaining some level of control or benefit during your lifetime.
- Charitable Giving Donating to qualified charities can reduce the taxable value of your estate. Charitable Remainder Trusts (CRTs) and other planned giving vehicles provide tax advantages while supporting causes you care about.
- Family Limited Partnerships (FLPs) FLPs allow you to transfer ownership interests in a family business to heirs at a reduced taxable value, leveraging valuation discounts.
These strategies are complex and require the guidance of experienced wills, trust, and estate lawyers. An experienced estate planning attorney in McAllen, TX can help tailor these solutions to meet your unique needs.
What Happens Without Proper Planning?
Without addressing potential estate taxes, your beneficiaries could face significant financial burdens. For example, if your estate exceeds the federal exemption by $2 million, your heirs could face an $800,000 tax liability at a 40% rate. Such unexpected costs may force the sale of valuable assets, including family homes or businesses, to cover the tax bill.
Don’t wait until it’s too late. Let us help you create a comprehensive estate plan that addresses tax implications and secures your family’s future. Contact us today to schedule a consultation with our knowledgeable attorneys in McAllen, Texas.