Many high-net-worth families may be wondering about how to avoid inheritance tax in Texas — and they should be. High-net-worth individuals spend their whole lives building a large estate, only to have a large chunk of it go to taxes when they die. Knowing how to avoid inheritance tax in Texas is something that all high-net-worth Texans should be concerned about, especially if you’re wanting to transfer ownership of your property to your children.
In the state of Texas, there is no inheritance tax but your estate may still be subject to federal estate taxes. Luckily, there are several ways to reduce or even eliminate your tax liability such as making gifts, setting up trusts, paying into life insurance, and investing in tax-advantaged accounts.
Avidian Wealth Solutions’ multi-disciplinary team of Houston estate planning advisors helps families with their estate planning, partnering with them to build and preserve their legacies for the next generation. In this article, we’ll lay out some of the most common methods used to avoid paying taxes on inheritance money in Texas.
Texas inheritance tax laws
So, do you pay taxes on inheritance money in Texas? How does inheritance tax work in Texas?
In Texas, there is no inheritance tax on the state or federal level, and no estate tax on the state level. What you and your inheritors need to be protected from is actually the Federal Estate Tax.
This federal tax is imposed on the value of the estate above a certain threshold which, as of 2022, is around $12.06 million per individual, paid by the estate rather than the beneficiary. There are several ways to reduce or eliminate your estate tax liability, although federal laws may be changing in the years to come.
The Biden Administration’s proposed estate tax changes would decrease the estate tax threshold from $12.06 million to $3.5 million, and would also increase the top estate tax from 40% to 45%. It’s important to note that these changes have not yet been approved, and they may not go into effect even if they are.
If you’re concerned about how potential estate tax changes could impact you, it’s best to speak with an estate planning professional. Avidian Wealth Solutions can help you understand the implications of any proposed changes and make sure that you’re taking steps to protect your assets.
5 ways to protect your estate from taxes
1. Make gifts during your lifetime
One of the best ways to reduce your estate tax liability is to make gifts during your lifetime. You can gift a certain amount of money or property each year to your heirs without incurring any gift tax.
As per the gift tax in Texas, Texas residents are allowed to gift up to $15,000 per person, per year, without triggering a gift tax. So if you have a large family, you could potentially gift $15,000, or its equivalent, to your heirs per year without paying any taxes on it.
2. Set up a trust
Another way to reduce your estate tax liability is by setting up a trust. There are several types of trusts including charitable trusts, life insurance trusts, and generation-skipping trusts, that can be used for estate planning purposes, each with its own set of rules and regulations.
For example, an irrevocable trust cannot be changed or revoked after it has been created, while a revocable trust can be modified at any time. In general, though, a trust can be used to hold assets on behalf of your heirs and can help you avoid paying taxes on those assets when you die.
3. Pay into a life insurance policy
Paying into a life insurance policy is another way to reduce your estate tax liability. When you die, the death benefit from your life insurance policy will be paid to your beneficiaries free of any taxes. This can be a great way to provide financial security for your loved ones without them having to pay any taxes on the money.
4. Invest in tax-advantaged accounts
Investing in certain types of tax-advantaged accounts can also help you reduce your estate tax liability. These accounts, such as a 401(k) or IRA, grow tax-deferred, meaning that you won’t have to pay any taxes on the money until you withdraw it. In some cases, the money can be withdrawn tax-free. This can be a great way to let your money grow without having to worry about paying taxes on it.
But, does the beneficiary pay taxes on an IRA? The beneficiary of an IRA does not have to pay taxes on the money when they inherit it. However, they will be required to pay taxes on any money that they withdraw from the account. So if the beneficiary decides to take all of the money out of the IRA right away, they will owe taxes on the entire amount.
5. Give to Charity
Another way to reduce your estate tax liability is to give to charity. Charitable giving is a great strategy that is available when tax planning for high-net-worth individuals. When you make a charitable donation, you can deduct the amount of the donation from your taxable income. This can help reduce the overall value of your estate and, as a result, lower your inheritance tax liability.
Preserve your wealth for the next generation with estate planning at Avidian Wealth Solutions
While Texas families don’t need to be concerned about inheritance tax, they may still need to create a tax savings strategy to protect their estate from federal taxes. You can do this by making gifts during your lifetime, setting up a trust, or investing in certain types of tax-advantaged accounts, you can potentially reduce or eliminate your federal inheritance tax liability.
Although you may feel that you can implement some of these tactics on your own, it’s important to speak with an estate planning professional to make sure that you’re taking the best possible steps to protect your assets. As a fiduciary wealth management firm, Avidian Wealth Solutions can help you understand the federal laws that govern your Texas inheritance tax, and make sure that you’re minimizing your tax liability for both you and your loved ones.
If you have more questions about how to avoid inheritance tax in Texas, avoiding capital gains tax, or want to talk about incorporating estate planning into your wealth strategies, schedule an appointment with us today.
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