Estate and Gift Tax Planning

Estate taxes have been called the "cruelest tax" or the "volunteer tax" because paying these taxes is generally avoidable and, if paid, results in a double tax on your wealth. When you purchase property, typically, it is with money you’ve already paid taxes on. Thus, when an asset you purchased is taxed upon your death, you end up paying taxes on the same asset twice. At McCulloch & Miller, PLLC, we believe that legal planning to avoid or minimize federal estate taxes is both a prudent and an important aspect of comprehensive estate planning.

The first thing to note about estate and gift tax planning is that Texas assesses neither of these taxes upon death. However, Texans still need to keep estate tax in mind, as the federal government levies estate tax on estates over a certain value. The federal estate tax is an excise tax assessed on the transfer of a person's assets after they die. Because of this, the federal estate tax is most accurately described as a transfer tax.

Not every estate is subject to estate tax. This is because the federal government allows an estate tax exemption. Thus, estates that fall under the exemption amount pay no estate taxes. As of 2022, the federal estate tax exemption is $12,060,000. This means that an individual can pass up to $12.06 million in cash and assets through their will without paying any estate tax. And because each spouse can take the exemption, a couple can transfer $24.12 million with no tax consequences.

However, the current federal estate tax exemption was temporarily increased by the Tax Cuts and Jobs Act, which is set to expire in 2026. Thus, on January 1, 2026, if Congress takes no action, the estate tax exemption will drop back to $5.6 million per person.

The Tax Cuts and Jobs Act creates a unified exemption that ties the gift tax and the estate tax together. As of 2022, the federal government allows individuals to make annual gifts of up to $16,000 without any tax consequences. Couples can gift up to $32,000 because each spouse is entitled to the exemption. Of course, you can make gifts in larger amounts, but they will eat up a portion of your lifetime gift tax exemption, which draws from the $12.06 million estate tax exemption. Thus, if you make a gift in excess of $16,000, it will result in a corresponding decrease in your estate tax exemption.

The Generation-Skipping Transfer Tax (GSTT) is a tax on property that is passed between generations. More specifically, the GSTT applies to transfers from one generation to another generation that is two or more generational levels below the transferring generation.

The amount that an individual can transfer between generations without paying the GSTT is known as the Generation-Skipping Transfer Tax Exemption. This exemption is also combined with the federal estate tax exemption and the lifetime gift tax exemption of $12.06 million.

Estate tax, gift tax, and the Generation-Skipping Transfer Tax are complex concepts; however, understanding these taxes is critical to developing an effective estate plan. If you have questions about the tax implications of your existing estate plan or your financial situation has changed in recent years, reach out to McCulloch & Miller, PLLC, to schedule a consultation. Our attorneys constantly stay up-to-date on the ever-changing estate tax landscape, providing our clients with reasoned advice and practical solutions. To speak with an experienced estate and gift tax planning attorney about the potential tax liabilities of your estate and what strategies may work best to minimize your estate’s tax exposure, give McCulloch & Miller, PLLC a call at 713-333-8900. You can also reach us through our online contact form.