There are two different types of estate taxes, which are federal and state taxes. In most cases, Texas beneficiaries are able to sidestep estate tax on a federal and state level. However, those in other areas face states taxes of up to 19 percent.
With regard to federal estate taxes, beneficiaries are allowed up to $5.25 million in exemptions. In addition, any unused portion can be allocated to their surviving spouse. In individual states, the exemptions can be far lower, and one state in particular, has an exemption of only $675,000. A way to avoid these circumstances is to establish estate planning in an area that does not have taxes, even if an estate owner does not live there.
A spouse living in one state can create a credit shelter trust in another state that does not have trust income tax. A study has shown that Texas, among other states, are one of the best places to retire when dealing with tax matters. Other areas, such as Washington D.C., and New York, impose their own fees on inheritance and gift taxes, and a person can end up paying out up to 19 percent.
Texas estate owners and trustees can benefit from creating trusts in states that have tax exemptions. It’s not a requirement for the estate owner to live in a tax exempt state in order to avoid their income being taxed. Being knowledgeable about individual state taxes and credit shelter trusts, with guidance from a financial adviser, can help simplify the estate planning process.
Source: The Wall Street Journal, Pay Attention to State Estate Taxes, This Adviser Says, Michael Foltz, Dec. 15, 2013