Although Texas does not enforce a state estate tax, also known as a death tax, if your taxable estate is worth over the lifetime exemption amount-$5.6 million for individuals in 2018-then your estate will be subject to the federal estate tax. And even though most Americans fall far below the tax’s reach, the estate tax has been a point of contention throughout most presidential elections, as candidates often have differing views on its importance to our nation’s economy.
The federal estate tax applies only to those who die with assets worth more than the lifetime exemption amount. Although it is true that couples have an $11.2 million combined estate tax exemption, meaning they can leave this amount to their beneficiaries tax-free, to take advantage of this benefit, a surviving spouse must elect the portability option on the estate tax return of the first spouse to die. The unlimited marital deduction allows spouses to leave their assets to the surviving spouse free of the federal estate tax. However, if the surviving spouse is unfamiliar with this election, the deceased spouse’s unused exemption will go to waste, potentially leaving the surviving spouse with a hefty estate tax bill.
Subsequently, if you are hoping to reduce your estate to avoid paying federal estate taxes, then a common solution would be to take advantage of annual gifts throughout your lifetime. The annual gift tax exclusion is $15,000 in 2018, and without a tax penalty, you can make gifts to any person you desire up to this amount each year. Other ways to reduce your estate tax bill include setting up an irrevocable life insurance trust, charitable remainder trust, or qualified personal residence trust-all of which will help remove the value of substantial assets from your estate while helping to avoid and reduce estate taxes.