Taxes

The Executor’s Responsibilities And Estate Vs. Inheritance Taxes

Overview of Probate

Probate in Texas is the legal process through which a deceased person's estate is administered and distributed. Governed by the Texas Estates Code, probate can be complex and time-consuming, often requiring legal assistance.

The Texas probate system is designed to protect creditors, beneficiaries, and the estate itself. It includes various rules and procedures to ensure the probate process is conducted fairly. The executor must notify creditors and beneficiaries, file necessary court documents, and manage the estate's assets responsibly. Understanding these legal requirements is crucial for anyone involved in probate.

Steps Involved in Texas Probate

When the court accepts the probate application, a hearing is scheduled to validate the will and appoint an executor or administrator for the estate. The executor's role is to manage the estate's assets, pay any outstanding debts and taxes, and distribute the remaining assets to the beneficiaries according to the will or state law.

Tax Responsibilities of the Executor

Managing Taxes

The executor of an estate has significant responsibilities regarding taxes during the probate process. One primary duty is to ensure all necessary tax returns are filed on behalf of the deceased and the estate. This includes the final federal and state income tax returns for the deceased and any estate tax returns that may be required. The executor must also ensure that any taxes owed are paid from the estate's assets before distributing the remaining assets to the beneficiaries.

Filing the Decedent's Final Income Tax Return

Filing the decedent's final income tax return is one of the executor's critical tasks. This return covers the period from January 1 of the year of death until the date of death. The executor must gather all necessary financial information, including income, deductions, and credits, to accurately complete the return. Common deductions and credits that may apply include medical expenses, charitable contributions, and any remaining mortgage interest or property taxes.

In addition to the final income tax return, the executor may also need to file a federal estate tax return if the estate's value exceeds the federal estate tax exemption threshold. As of January 1, 2024, the federal estate tax exemption is $13.61 million. If the estate's value is below this threshold, no federal estate tax is due. However, the executor must still file the return to document the estate's value and claim any applicable exemptions. Understanding these requirements is essential for ensuring compliance with tax laws and minimizing the estate's tax liability.

Estate Tax vs. Inheritance Tax

A common point of confusion in the probate process is the difference between estate tax and inheritance tax. Texas does not impose a state inheritance tax, meaning beneficiaries do not pay taxes on inherited assets. However, federal estate tax may apply if the estate's value exceeds the federal exemption threshold.

Federal estate tax rates are progressive, starting at 18% and reaching up to 40% for estates exceeding the exemption threshold. Executors must carefully calculate the estate's value, including all assets and liabilities, to determine whether estate tax applies. Proper planning and understanding of these tax laws can help minimize the estate's tax liability and ensure a smoother probate process.

Federal and State Tax Obligations

Federal Estate Tax

The federal estate tax is a tax on transferring a deceased person's estate, applying to the fair market value of the estate's assets at the time of death, minus allowable deductions. Estates valued below the federal estate tax exemption amount are not subject to the tax.

Executors must be diligent in valuing the estate's assets and claiming available deductions, such as debts, funeral expenses, and charitable contributions. Accurate documentation and reporting are essential to ensure compliance with federal tax laws and minimize the estate's tax liability.

Texas State Taxes

Texas does not impose an estate or inheritance tax, making it attractive for estate planning. However, Texas estates are not free from all tax obligations. Executors must address other state taxes, such as property taxes and any outstanding state income taxes for the deceased. Additionally, Texas estates must comply with federal tax laws, including the federal estate tax if applicable.

While Texas lacks an estate or inheritance tax, executors should stay informed about potential changes in state tax laws that could impact the estate. Staying current with tax regulations and seeking professional advice can help ensure all tax obligations are met, and the estate is administered efficiently.

Gift Tax Considerations

Lifetime gifts can significantly impact estate taxes by reducing the estate's overall value. The federal gift tax applies to significant gifts made during a person's lifetime, with an annual exclusion amount of $18,000 per recipient for 2024. Gifts exceeding this amount must be reported on a federal gift tax return, and the excess is counted against the lifetime estate and gift tax exemption.

Executors must consider significant gifts made by the deceased when calculating the estate's value and determining the applicable estate tax. Proper documentation and reporting of these gifts are crucial for compliance with federal tax laws and avoiding potential penalties. Understanding the interplay between gift and estate taxes can help executors and beneficiaries plan more effectively and minimize the estate's tax liability.

Tax Implications for Beneficiaries

Income Tax on Inherited Assets

Inherited assets have varying tax implications. Real estate, stocks, and investments typically receive a "step-up" in basis, adjusting the asset's value to its fair market value at the time of death. This reduces capital gains taxes when beneficiaries sell the asset, as gains are based on the stepped-up value rather than the original purchase price.

However, not all inherited assets get a step-up in basis. Retirement accounts like IRAs and 401(k)s do not receive this adjustment, requiring beneficiaries to pay income tax on distributions. Understanding the tax treatment of different inherited assets is crucial for effective planning and minimizing tax liability.

Distribution of Retirement Accounts

Inherited retirement accounts, such as IRAs and 401(k)s, follow specific tax rules. Beneficiaries must take Required Minimum Distributions (RMDs) from these accounts, which are subject to income tax. The RMD rules vary depending on the account type and the beneficiary’s relationship to the deceased. Spousal beneficiaries have more flexibility, while non-spousal beneficiaries must adhere to stricter distribution rules.

Properly managing the distribution of retirement accounts helps minimize tax liability and avoid penalties for missing RMDs. Consulting with a financial advisor or tax professional provides valuable guidance on strategies for handling inherited retirement accounts and ensuring compliance with tax laws.

For Professional Advice and Resources, Call (972) 945-1610

Navigating probate and tax laws can be daunting, making professional advice invaluable. Consulting with tax professionals, estate planners, and attorneys offers essential guidance for managing the estate and minimizing tax liabilities. These experts help executors and beneficiaries understand their legal and financial obligations, develop strategies, and ensure compliance with relevant laws.

Various resources, such as online tools, educational materials, and support from professional organizations, assist executors and beneficiaries. Utilizing these resources helps individuals make informed decisions and navigate probate confidently.

Contact Crain & Wooley Today

Navigating probate and managing tax implications can be overwhelming. At Crain & Wooley, we specialize in estate and probate law, offering expert guidance through every step. Whether you're an executor, beneficiary, or planning for the future, our experienced team is here to help. Contact our office online or call (972) 945-1610">(972) 945-1610 to schedule a consultation and learn how we can assist you in managing your estate and minimizing tax liabilities effectively. Let us provide the professional support you need for a smooth and efficient probate process.

The original SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) became law on December 20, 2019 and changed laws related to tax-advantaged retirement accounts.

See our previous articles on SECURE 1.0 here:

• The End of the Stretch IRA and More
• What Does the Secure Act Really Mean to Me?

There is now a new SECURE ACT 2.0 being proposed.

The House approved SECURE 2.0 in a 414-5 vote on March 29, 2022 (see H.R. 2954).

The Senate has not approved the act that the House passed. In the Senate, there is a similar (but different) bill currently in the Finance Committee pending a vote (see (S. 1770).

Some highlights that are currently in either the House or the Senate version are as follows:

• Creating a way to find “lost” retirement savings accounts (it turns out many people have forgotten about some of their old retirement accounts). The Department of Labor would be required to create a national online lost and found database for retirement plans.
• Allowing certain part-time employees who work at least 500 hours for two years to be eligible for their company 401k plans.
• Provisions making it easier for companies to contribute to 401k plans on behalf of their employees who are making student loan payments instead of contributing to their 401k plans.
• Automatic enrollment in 401k plans, which would require companies to automatically enroll employees in 401k plans at a rate of at least 3% and then increase each year until employees are contributing 10% of their pay.
• Increasing the amount allowed to be contributed as catch-up contributions (Example: as of today, someone 50 years old or older can make catch-up contributions to their retirement savings in addition to the standard annual contribution limits of $20,500 for 401(k) plans and $6,000 for individual retirement accounts in 2022. Currently, a catch-up contribution of an extra $6,500 in a 401(k) or $1,000 in an IRA is allowed.)
• The SECURE ACT 1.0 changed required minimum distributions to begin at age 72 instead of age 70 ½ . SECURE 2.0 is proposing mandatory distributions wouldn’t have to start until ae 73 in 2023; age 74 in 2030; and age 75 in 2033.
• Changes to the Required Minimum Distribution (RMD) penalty. Currently, if you don’t properly take your full RMD, you are taxed with a 50% tax penalty. The proposed change makes that penalty a 25% tax with the option to timely correct the issue with only a 10% tax penalty.

Crain & Wooley will continue to update our clients as more information becomes available. Our next client quarterly webinar is coming up in June. Keep your eyes out for the registration invitation.

Part of creating a comprehensive estate plan is figuring out a way to reduce or eliminate estate taxes. Unfortunately, estate planning laws are complicated and difficult to understand. To guide you through the process, our Dallas-Fort Worth estate planning lawyers have put together four tips to help you avoid or reduce estate taxes.  

#1: Establish a Trust  

A trust is a common estate planning document that many people use to reduce or avoid estate taxes. It’s important to note that if your trust doesn’t hold any assets, it’s not providing any benefit to you or your family. You must place assets in your trust to see tax reduction benefits. 

#2: Give Gifts to Family 

Another way to avoid estate taxes is by handing off portions of your estate to your family through gifts. You can give anyone person up to $16,000 (updated in 2022) tax-free or up to $32,000 for a married couple with joint tax returns. In total, you can give up to $11.7 million of your wealth as gifts before having to pay gift taxes. Don’t just jump into this gifting option without the proper education as it can get tricky – read more here.  

#3: Charitable Giving  

Making charitable donations also has many tax advantages. To maximize tax benefit, it is important to make donations to a recognized 501(c)(3) charity or recognized foundation and keep proper records. If you are giving anything other than cash then you must understand how the value of your gift will be treated by the IRS. 

Learn more about charitable giving and estate taxes in our blog post here.  

#4: Seek Legal Guidance  

Finding the right tax break options for your estate plan isn’t always the most obvious option. The best way to determine a way to avoid estate taxes is by having an experienced attorney guide you through the process. An attorney can work with you to determine which estate planning steps you should take to protect your assets while also considering tax break advantages.  

If you need help creating a comprehensive estate plan, contact our Dallas-Fort Worth estate planning lawyers today at (972) 945-1610 to schedule a consultation! 

There are social and emotional benefits of charitable giving and there are also potential financial benefits to these types of gifts. Your estate plan can include these types of gifts both during your life and upon your death. In many instances, charitable donations have potential tax advantages. A knowledgeable attorney can assist you in determining how to plan for charity in such a way to maximize the benefit to charity, your family, and you.

For example, gifting to charity now may allow you to deduct cash contributions in 2021 up to 100% of your adjusted gross income for cash distributions to qualifying public charities (this used to be a 60% limit previously). To make sure gifts maximize your tax benefit, it is important that your donations are given to a recognized 501(c)(3) charity or recognized foundation, that you keep proper records, and if you are gifting anything other than cash that you understand how the value of your gift will be treated by the IRS.

Depending upon your specific situation and potential need for long-term tax planning, more complex charitable planning is appropriate and may include using one of several types of trusts that exist to facilitate charitable giving and maximize tax benefits.

For example:

• Charitable Remainder Unitrusts (CRUTs).
  • This arrangement allows a person to receive an income tax deduction the year they contribute to their CRUT; the person contributing to the CRUT can set up a variable income stream that pays them back for life; when the creator of this trust dies, the remaining assets go to the charities named in the trust tax free;
• Charitable Lead Annuity Trusts (CLATs)
  • The charitable beneficiary in this arrangement receives a fixed amount during the term specified in the trust; the person contributing to the CLAT names non-charitable beneficiaries to get the remaining assets at their death; when the creator of the trust dies, the remaining assets distribute back to the non-charitable beneficiaries;
• Charitable Remainder Annuity Trusts (CRATs)
  • Similar to a CRUT, except the assets distributed to the charity are fixed instead of variable; the person contributing to the CRAT receives an income tax deduction; when the creator of the CRAT dies, the charity receives the remaining assets;
• Charitable Lead Unitrusts (CLUTs)
  • Similar to a CLAT, except the assets distributed to the charitable beneficiary are variable instead of fixed and must be distributed annually.

Charitable planning is important! Don’t forget to include charitable considerations into your estate planning. As we look to the future and weigh POTENTIAL tax law changes, it is important to remember that, currently, there are strategies that exist to minimize negative impacts. Crain & Wooley stays abreast of all law proposals and is constantly monitoring ways in which we can lessen the potential impact for our clients.

Have questions? Ready to improve your charitable giving plan? Contact Crain & Wooley.

The IRS describes Basis as “generally the amount of your capital investment in property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange, or other disposition of the property. In most situations, the basis of an asset is its cost to you. The cost is the amount you pay for it in cash, debt obligations, and other property or services.”

If you leave assets to beneficiaries when you die, the basis of the assets you purchased are stepped up. Your beneficiaries take the asset at the new basis of the fair market value of the asset at the time of your death.

If you buy a house for $200,000 and you die in 2025 when the house is worth $450,000, your child gets a step-up basis at your death. Your child’s basis in this example would be $450,000. This means that your child can sell the house for $450,000 and she will not have a capital gain.

If you give (deed) your house to your daughter while you are living, the basis your daughter receives in the house is different. Your daughter would not receive a step-up in basis and when she sells the house, she will have to pay the difference in the sale price of the house and your original basis (your original purchase price) to determine her capital gain. This is because gifts made during your lifetime to retain the basis of the property from when you purchased the property.

Because step-up basis only applies to gifts you make after death, it is often better to give your assets to your loved ones in death, via an inheritance, rather than in life if you are planning with the goal of reducing taxes and maximizing the value of your assets for your beneficiaries.

To learn more about the best ways to leave an intentional legacy for your loved ones, contact Crain & Wooley today.

Tax rates and paying taxes seem to consume our minds for very good reason – the U.S. Tax Code is complicated. A common area of confusion for some small business owners surrounds the topic of an “L.L.C. (Limited Liability Corporation) versus an S Corp”. Many people, to their detriment, use these terms interchangeably. THESE TERMS ARE NOT ONE AND THE SAME. 

An L.L.C. is a formal business structure that, when used correctly, provides protection for the business owner’s personal assets by separating personal and business activities. An S Corp is a type of tax classification that can be used by both corporations and LLCs and has the potential to save some business owners money while positioning their business for growth.

Corporations are normally taxed at the corporate entity level, but an S Corporation is not. S Corporations instead elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This pass-through means that all financial considerations are assessed at the individual income tax rates of shareholders and a benefit is that the S Corporation can therefore avoid double taxation on corporate income.

To qualify as an S Corporation, the company must not have more than 100 shareholders, must be a US company, must be meet certain shareholder qualifications and cannot be what is considered an ‘ineligible corporation’ under the law. If the company meets all the requirements, the corporation must submit Form 2553 no more than two months and 15 days after the beginning of the tax year the S Corp election is going take effect (IRC 1362(b)).

The S Corporation election may be of great benefit if you are considering starting a small business, or perhaps are already a shareholder in one. However, it is important to know your options and carefully consider how to best structure your entity. 

Do you own a small business? Do you have questions on how best to structure your business or how to plan for business continuity in times of incapacity or death? Give us a call (972) 945-1610 or comment below.

A number of our clients have a trust as the main document in their estate plan. Some of them created a trust before ever talking with Crain & Wooley and were not educated on how a properly crafted trust works. For example, some people never put anything in their trust (attorneys call that funding the trust). One reason people say they didn’t fund their trust is that they didn’t know they should. Another common reason people say they didn’t put anything in their trust is they were afraid it would negatively impact their taxes.

It is extremely important that you make sure your assets are part of your trust. If your trust does not hold any assets, your trust is not doing anything! Only assets held in the trust are subject to the provisions of your trust. You must place assets in your trust. Your attorney should help you to understand how your trust works and explain to you how your trust will affect your taxes once the trust holds your assets.

For those concerned that you would lose your homestead exemption (or 65 and older exemption, or other tax exemptions) if you put your house in a trust – you don’t have to worry! If your Trust and accompanying legal documents are drafted properly, you do not lose your tax exemptions on your house if your house is in your trust.

If you are the owner of the house and you create a trust that you stay in charge of as trustee, the law is on your side. Some clients have come to me thinking that they can’t put their house in their trust until they pay the mortgage loan off. The good news for that situation is that you can put your house in your trust even if it is currently subject to a mortgage, without triggering any due on sale clauses. You should not wait to put assets in your trust because you might wait until it is too late.

For those concerned that a trust may cause your tax rate to be much higher due to trust tax rates – you don’t have to be concerned either! If drafted properly, your trust can be considered a pass-through entity and your tax rates will be the same both before and after your trust is in place.

Don’t let tax concerns or lack of knowledge prevent you from enjoying the benefits of a properly drafted and executed trust. Whether it is your first trust or you are updating an existing trust – you should work with a legal professional who can help to educate and guide you through the proper creation and effective use of this important legal tool.

Have questions? Contact us today!

The End of the Stretch IRA

The Stretch IRA was a financial strategy that allowed inherited IRAs to be stretched out over the lifetime of a beneficiary. To put it another way, Stretch IRAs allowed a beneficiary who was younger than the former owner of the IRA to stretch out distributions over the beneficiary’s (presumably longer) lifetime, resulting in a longer period of time for funds to compound principal and defer tax.

The SECURE Act signed into law on December 20th, 2019 ended the ability to use Stretch IRAs as a financial strategy. Under the new law, beneficiaries inheriting an IRA are required to take the funds out, and pay the appropriate taxes, within 10 years of the death of the original IRA owner.

Changes to Age for IRA RMDs

Another IRA rule that has changed under the SECURE Act is the age at which a traditional IRA owner is required to begin taking their required minimum distributions (RMDs). Previously, an IRA owner was required to start taking distributions out of their IRA by April 1st of the year after turning 70 1/2. The SECURE Act changed that age to 72, unless you are already 70 1/2 or more as of December 31, 2019.

Do you have questions about how the legislative changes may impact you and your family? Contact us today!