Over the next ten years, Gen Z-ers and Millennials are estimated to receive the largest transfer of wealth in history (over $68 trillion dollars) from their baby boomer parents and grandparents. Understanding inheritance tax and the many factors that come with estates and inheritance is now more important than ever.

While, of course, we recommend speaking with an estate planning lawyer who will help guide you through this necessary (and often complicated) process, here are a few important realities for Gen Z-ers and Millennials to know now:

State and Federal Estate Tax

The estate tax is a completely different tax than income tax. While income tax is a yearly tax on your income earned during that year, the estate tax is a one-time tax on a person’s assets after they die. It is due nine months after a person dies if certain monetary thresholds are met.

These state and federal estate taxes may be imposed on—and paid from—an estate upon its inheritance. If the estate passes to a surviving spouse, there is no tax. However, if the estate is being passed down to a child, grandchild, or other loved ones, estate taxes may be assessed.

For estates valued over the exemption threshold of $12M in 2022, the amount that exceeds the threshold will be taxed. For example, a $15M estate in 2022 would only pay taxes on $3M.  (Note that the exemption threshold is to drop to $5M in the year 2026, and there are various politicians seeking to change to an even lower number).

An estate tax may also be levied by the state in which the deceased was living, although not all states do this, including Texas.  The state thresholds are lower than the federal limit and vary by state (for example, Connecticut has a $7M threshold while the threshold in Massachusetts is $1M), but no estate valued under $1M will be taxed anywhere.

However, with respect to Texas, keep in mind that while it does not impose an estate or inheritance tax, there are instances when such taxes are levied against inheritances where an estate involves property in another state that does have an estate tax

State Inheritance Tax

Inheritance tax is paid by you, the beneficiary, rather than the estate itself. Only six states currently have inheritance taxes: IA, KY, MD, NE, NJ, and PA. The particulars vary by state and apply only if the decedent lived in that state, or owned property there.

The rate at which you will be taxed depends on many factors, like the value of the estate, relationship to the deceased, and specifics related to the state in which the decedent lived.

Trusts, Gifts, & Other Options

An estate planning lawyer can help minimize how much estate tax and inheritance tax you may have to contend with.  There are numerous other options, such as trusts and gifts, that an estate planning lawyer can explore with you, which will keep your inevitable estate and inheritance tax in mind.

We Are Here to Help!

If you have any questions about estate planning or are ready to take the next steps for yourself or your loved ones, contact the Law Firm of Blanche D. Smith either by calling (936) 301-0111 or using the contact form on our website.