As a Houston, TX estate tax lawyer with over a decade of experience can explain, estate taxes can take a big bite out of the value of your estate before it’s passed on to your family. If you’re living in Houston, Texas, there are smart strategies available to help lower this tax impact through gifting. This article will explain how gifting can help you minimize your estate tax and make sure more of your wealth goes to your loved ones.
The Basics
In the U.S., the federal estate tax applies to estates that exceed a certain value. For 2024, the federal estate tax exemption is $13.61 million per individual. This means if your estate is worth less than this amount, you won’t owe any federal estate tax. However, if your estate exceeds this threshold, you could face a tax rate up to 40%, which can greatly reduce the inheritance your heirs receive.
Fortunately for Houstonians, Texas does not have a state estate or inheritance tax. This simplifies estate planning compared to states with their own estate taxes.
One effective way to manage estate taxes is through gifting — transferring assets to others while you’re still alive. By giving away assets now, you can reduce the size of your taxable estate and potentially avoid a large tax bill later.
Annual Gift Tax Exclusion
For 2024, you can give up to $18,000 per person each year without having to pay gift tax. If you’re married, you and your spouse can combine your exclusions, allowing you to gift up to $36,000 per person annually. This means you can give substantial amounts to your loved ones each year without affecting your lifetime gift tax exemption.
For example, if you and your spouse have three children, you can each gift $36,000 to each child every year. This totals $108,000 per year, which can add up over time. In a decade, this strategy could transfer over $1 million to your children, significantly reducing the value of your estate.
Lifetime Gift Tax Exemption
In addition to the annual exclusion, there’s a lifetime gift tax exemption, which matches the estate tax exemption at $13.61 million per person. Gifts that exceed the annual exclusion count against this lifetime exemption. Once you use up this exemption, any additional gifts may be subject to gift tax.
For instance, if your estate is valued at $15 million, you can gift up to $13.61 million during your lifetime without incurring gift tax, leaving just $1.39 million subject to estate tax when you pass away (assuming no other adjustments or deductions).
Effective Gifting Strategies For Houstonians
Here are some effective ways to use gifting for estate planning:
1. Direct Gifts: You can give cash, stocks, or other assets directly to your beneficiaries. This straightforward approach can be repeated annually within the exclusion limits, reducing your estate’s size over time.
2. Tuition and Medical Payments: Payments made directly to educational institutions or medical providers on behalf of others are not subject to gift tax. These payments don’t count against the annual exclusion or lifetime exemption, allowing you to help your loved ones while preserving more of your exemption for other gifts.
3. Irrevocable Trusts: By placing assets into an irrevocable trust, you remove them from your taxable estate. Various trusts, like a Crummey trust, allow beneficiaries to withdraw contributions for a short period, qualifying the gift for the annual exclusion. This can effectively lower the value of your estate while providing for your beneficiaries.
4. Family Limited Partnerships (FLPs): Transferring business or investment assets into an FLP and gifting partnership interests to family members can provide valuation discounts due to marketability and minority interest. This further reduces the taxable value of the gifted assets.
In Houston, using gifting as part of your estate planning can significantly reduce your estate tax liability. By taking advantage of the annual gift tax exclusion and lifetime gift tax exemption, you can transfer wealth to your heirs in a tax-efficient way. With Texas not having its own estate tax, you’re in a favorable position to make the most of these strategies. Consulting with an estate planning professional will help you tailor these strategies to your situation and ensure compliance with tax regulations. Thoughtful gifting decisions can help you maximize the value of your estate passed on to your loved ones while minimizing your estate tax burden. Contact Stuart Green Law, PLLC — who has been practicing law since 2012 — for help today.