Estate Taxes
Estate taxes for Texas residents are limited to a federal estate tax. The state of Texas does not have its own estate tax like some other states.
Federal estate taxes affect individuals who pass with estates over $5,000,000 in 2011 or 2012 and married couples over $10,000,000 in 2011 and 2012.
In 2013, the federal estate tax rate is set to drop to $1,000,000 unless congress raises the limit, which it did at the end of 2010 when the estate tax was to drop from 2009 levels of $3,500,000 and no estate tax in 2010 to $1,000,000. At the end of 2010, Congress quickly passed a bill raising the limit for two years to the $5M level.
How do estate taxes work?
If the estate tax limit is $5M, the first $5M of an estate passes without any federal estate tax. Any amount over the limit is taxed on a scale that reaches 45%.
How does one calculate one's estate value?
For a rough estimate, add the value of your assets (real estate, IRAs, life insurance, etc) and subtract your liabilities (remaining mortgage, loans, etc). The result is your net estate subject to the estate tax. Life insurance payouts count towards your estate if you are the owner of the policy - even if someone else is the beneficiary.
Living Trusts
Congress in 2010 also changed laws regarding the necessity of a living trust for married couples to double their estate tax exemption. No longer is that necessary - unless Congress reverts back to estate tax planning laws before 2011. Here is how a living trust helped prior to 2011:
A living trust can help married couples by providing each spouse with an exemption. Otherwise, when the first spouse passes, all assets pass tax-free to the surviving spouse (the unlimited marital deduction). When the surviving spouse passes, he or she has only his or her exemption.
If a living trust is set up as an A-Disclaimer or bypass trust, the surviving spouse has 9 months within the first spouse's passing of splitting the trust into two trusts - one for the surviving spouse and one for the deceased spouse. Assets can be split between the trusts, each with a $5M exemption to allow a total of $10M to pass without being exposed to estate taxes.
Assets in the deceased spouse's trust are typically off-limits to the surviving spouse. Only income can be taken without restrictions. The deceased spouse's trust is also irrevocable while the surviving spouse is living.
An A-B trust splits the assets before the either passes. A-B trusts have other uses but when estate taxes are only a possibility and not a certainty, it is wise to discuss with an attorney whether an A-Disclaimer or bypass trust is more appropriate.
Consult an attorney if you believe your estate will be subject to estate taxes.
