Adults who put together comprehensive estate plans often have clear wishes regarding their personal legacies. People often name family members, including children and spouses, as their primary beneficiaries. It is quite common for estate planning to focus on ensuring that those beneficiaries receive as much of someone’s property as possible.
Unfortunately, other parties may potentially interfere with a testator’s wishes. The law in Texas requires that the personal representative or executor of an estate address someone’s personal financial liabilities before beneficiaries receive anything from the estate. Creditors, including hospitals and credit card companies, can demand repayment using estate resources before family members inherit anything.
Tax obligations also take priority over the inheritance rights of individual beneficiaries. Are taxes likely to significantly diminish what people inherit from an estate?
Taxes affect most estates
Certain tax obligations are almost universal during estate administration. The personal representative of an estate usually needs to file a final tax return on behalf of the decedent. If the probate process involves the sale of any estate resources, then the personal representative may also need to file an income tax return on behalf of the estate. Resources from the estate must go to pay the balance due for income taxes. Such obligations are usually minimal.
Estate taxes, on the other hand, could burn through a substantial portion of the estate’s total value. Texas does not assess and collect estate taxes, but the federal government does. An estate with a total value of $13.61 million or more in 2024 could be subject to estate taxes. The federal estate tax rate is progressive.
The amount of tax someone has to pay increases with the overall value of their estate. The lowest federal estate tax rate is 18%, but the highest could be as much as 40% of the total value of the estate. Those who have significant resources in their names need to plan carefully to minimize tax liability.
Some people create trusts as a way to diminish their personal holdings. Others arrange to make gifts to their loved ones while they are still alive. Those who have the foresight to address estate tax obligations can often maximize what resources they leave for their loved ones after their passing.
Learning about the tax obligations that could diminish the value of an estate may be beneficial for those creating or updating their estate plans. Testators aware of probate liabilities can sidestep issues that might otherwise diminish what their loved ones receive from their estates.
