One nagging thought that may remain in your head throughout the estate planning process is that many of the assets you have earmarked for your beneficiaries will inevitably go towards paying the estate’s taxes. Yet, is this truly the case?
As one of the primary goals of estate planning is to limit the potential liabilities against your estate, planning for estate taxes should be a priority in your plan. Texas does not impose a state estate tax on local residents, meaning that the only potential tax liability you have to worry about comes from the federal level.
Understanding the federal estate tax threshold
Yet federal law provides measures through which you can limit your estate tax liability (or avoid one altogether). Indeed, there is an estate tax exemption that allows many estates to avoid taxes altogether. Per the Internal Revenue Service, the exemption threshold for 2020 is $11.58 million. You may be able to effectively double that amount by working with your spouse to take advantage of estate tax “portability.”
Portability is the process through which parties can share tax benefits. To fully optimize estate tax portability, you must plan to take advantage of another tax benefit: the unlimited marital deduction.
Through the unlimited marital deduction, you can pass an unlimited amount of assets to your spouse without them being subject to tax. Therefore, leaving your entire estate to your spouse not only avoids taxes, but also preserves your estate’s tax exemption. Your spouse can then claim your unused exemption (and combine it with their own) by electing portability following your death. To do this, they must file an estate tax return within nine months of your passing stating their intention to choose portability.
You did not work hard for your assets and plan carefully only to have your beneficiaries lose out to the estate tax. Taking the next step and insulating them from the tax will help them receive the true value of their inheritance.