Planning for federal estate taxes

On Behalf of | Mar 22, 2021 | Estate Planning |

One important element of the estate planning process in Texas involves recognizing those opportunities where one can limit the liabilities facing their estates. Most assume, however, that taxes are one expense they cannot avoid.

Yet that may not be the case. First and foremost, Texas does not impose a local estate tax on its residents. This means that the only potential tax liability facing Texas residents’ estates comes from the federal level. One might even be able to limit that expense (or avoid it entirely).

Understanding the federal estate tax exemption

A federal estate tax exemption exists that limits the tax liability estates may face. According to information shared by the website SmartAsset.com, the estate tax exemption threshold for 2021 is $11.7 million. This means that those estates whose total taxable value does not exceed that amount will not be subject to tax.

Leveraging estate tax portability

Married couples might be able to extend their exemption amounts even further. Tax portability allows eligible parties to share their tax benefits. In regards to estate taxes, one can claim the unused portion of their deceased spouse’s exemption.

To make the most of this benefit, one must plan to leave their entire estate to their spouse upon their death. This takes advantage of the unlimited marital deduction (which allows one to pass an unlimited amount to their spouse tax-free). This preserves their entire estate tax exemption, which (per the Internal Revenue Service) their ex-spouse can then claim by filing an estate tax return within nine months of their death electing portability.

One must remember to plan for this final step (as portability does not occur automatically). A failure to do so could inadvertently push the values of the surviving spouse’s estate above the threshold (making it subject to tax when it otherwise would not have been).