The thought of taxes eating up any portion of your estate after you have worked your entire life in Texas to accumulate assets to benefit your heirs can be downright disheartening. Yet it is an inevitability that many may say you must accept. Is that indeed true?
As it turns out, not always. In reality, only a small portion of estates will actually be subject to federal taxes, and Texas does not levy an estate tax on its residents. Even those with potentially taxable estates can find a way to avoid it with the proper planning.
The estate tax threshold
The federal government has established an estate tax threshold that serves as the cutoff line for taxable estates. Per Forbes Magazine, that threshold is $11.4 million for 2019. This means that as long as the total taxable amount of your estate is less than the threshold, your assets are exempt from taxation. There is no federal or estate inheritance tax, meaning that your heirs will typically not have to pay any taxes on whatever assets you bequeath to them.
Estate tax portability
You can also avoid having to pay the estate tax if you are married. You or your spouse can elect estate tax portability. This allows the combination of the unused portion of yours or your spouse’s estate tax exemption, allowing the two of you to protect as much as $22.8 million from tax.
Portability does not happen automatically, however. You or your spouse must elect it by filing an estate tax return within nine months of your spouse’s or your death. The consequences of failing to do this could be costly.
Say, for instance, that you leave the entirety of your estate to your spouse. Even if its total amount was not above the threshold, once you combine your estate’s assets with your spouse’s, that amount might indeed be above the threshold and would thus make his or her estate subject to tax.
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