Introduction to Estate and Gift Tax Rules
Clients contemplating making changes to their estate plan, or considering gifting land or other assets to their children or other persons, are often surprised to learn that federal estate and gift taxes may be a factor. We are not tax lawyers and do not provide tax advice, but the following general information may be helpful in determining whether you need to consult with your C.P.A. or other tax professional.
The Estate Tax is a tax on the value of property transferred at death. The tax is applied to the fair market value of essentially everything owned by the decedent on the date of death, less certain deductions allowed by law. "Fair market value" is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. This value may vary significantly from the original purchase price or the value shown on the tax rolls. Without at least some basic planning, estate taxes may siphon away 40% or more of an estate.
Fortunately the vast majority of clients are able to avoid the estate tax entirely due to the "unified credit." For example, in most cases no estate tax return would be filed and no estate tax would be due for persons who died in Texas in 2023 with an estate worth less than $12,920,000. A change made in 2011 allows the transfer of an unused portion of the decedent's exclusion amount to a surviving spouse, potentially enabling that spouse to transfer an even larger estate tax-free upon his or her death. However, in order to elect portability of the decedent's unused exclusion amount, the estate's representative must file an estate tax return. Even larger estates can be preserved with careful use of trusts or other estate planning techniques.
The gift tax is a tax on the value of any property transferred during life without charge, or for less than full value. The tax applies whether the owner intended to make a gift or not. Gift tax issues often arise in the context of adding someone to your deed, gifting property to children, and making loans at less than a market rate of interest. The gift tax is normally charged to the person making the gift.
Generally transfers between spouses are not covered by the gift tax. In addition, the "annual exclusion" allows you to gift up to $17,000 per person each year without triggering a gift tax.
Estate taxes and gift taxes are a regular source of discussion in Congress, and the rules change with some regularity based on the state of the economy and the political party in power. In addition, there are many exceptions and nuances to the rules that exceed the scope of this general introduction. Clients with estates large enough to be affected by these rules would be well-advised to monitor the situation carefully, to consult with their chosen tax professionals, and to schedule periodic estate plan reviews.
Roberts & Roberts provides legal services in the fields of real estate, probate, estate planning, and business law. If you have questions about estate planning in Texas, or if you need an attorney in Killeen, Texas, we would welcome the opportunity to consult with you.