Tax Issues

Will my estate automatically have to pay taxes at my death?

Not necessarily. In the event your gross estate (i.e., all of the assets in which you own an interest-probate and nonprobate) is less than the $1,500,000 exemption allowed under law, no estate tax will be due at the time of your death. Your gross estate will even include such assets as life insurance, assets held in a living trust, qualified retirement plan benefits, and IRAs.

What do I do if I am married and my estate at the time of my death is over the $1,500,000 exemption equivalent?

You have several options. One thing you can do if you are married is, at the time of your death, defer estate taxes by leaving your estate either in a qualified trust for your spouse or by leaving it directly to your spouse. Just remember, any property you give to your spouse is subject to estate taxation upon the spouse’s death, unless the spouse spends the amount given before death. Therefore, it is a good idea for married couples to avoid stacking more than $1,500,000 of assets in the second or surviving spouse’s estate.

A second option to consider is using a “credit shelter” or “bypass” trust to hold the exemption equivalent amount ($1,500,000) for the benefit of the surviving spouse or your descendants. Upon the death of the surviving spouse, the money will pass free of estate taxation to descendants or other persons designated by the spouse who created the trust.

Are my beneficiaries liable for estate or gift taxes upon my death?

Any transfer tax, i.e., estate or gift tax, is assessed against the person making the transfer (for example, the decedent’s estate or the giver of a lifetime gift). Anytime a taxable gift is made, the person making the gift must file a timely gift tax return and pay any and all gift tax that might be due. The executor of the estate must timely file a federal gift tax return for any estate with gross assets equaling over $1,500,000 and pay any applicable taxes due. In some cases, however, the tax apportioned to the gift is borne by the recipient of the gift.

Does the State of Texas have an estate tax?

Texas has an inheritance tax, which is tied to the federal estate tax system. If you do not have a taxable estate for federal estate tax purposes (i.e., the estate is less than $1,500,000), then you will owe no Texas inheritance tax. If you do owe a federal estate tax, you will owe to the State of Texas all or a portion of the credit for state death taxes allowed in the federal estate tax return (based on the percentage of your estate taxable in Texas).

What will my basis be, for income tax purposes, in assets I receive by gift or inheritance?

A person who receives a lifetime gift takes a “carryover basis” (i.e., maintains the same basis that the giver of the gift had in the asset). A person who receives a gift under a will or by inheritance upon another person’s death receives a new basis equal to the fair market value of the asset on the person’s date of death (or on the alternate valuation date, which is six months after the date of death, if that applies).