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How to minimize taxes and avoid probate when estate planning

On Behalf of | Jul 18, 2023 | Estate Planning

The goal of estate planning is typically to control what will happen with one’s property after their death and also to maximize what someone provides for their loved ones during that difficult time. There are multiple issues that can diminish what someone leaves for their loved ones after their death and addressing them proactively can make all the difference.

Probate court can consume thousands of dollars from an estate, as every hearing in court contributes to the total cost of the estate administration process. Probate court is also where creditors can make claims against someone’s assets and potentially prevent them from passing to loved ones. Additionally, there are taxes that can apply when someone dies.

How might a testator in Texas putting together an estate plan minimize the probate oversight required and also reduce their tax obligations while estate planning?

Trusts are very useful estate planning tools

For those who hope to avoid taxes, creditor claims or probate complications, a trust is a very powerful tool. The assets that someone uses to fund a trust will not pass through probate court. They are there for typically not at risk of creditor claims and will not increase the value of the estate, which might lead to estate taxes.

Although Texas does not assess estate taxes or inheritance taxes, the federal government can collect taxes from estates worth millions of dollars. If the total value of someone’s property is more than $12,920,000, then their estate would be responsible for paying taxes before distributing their property to their selected beneficiaries. In some cases, the final tax rate for federal estate taxes could be as much as 40% of the estate’s total value.

Trusts not only protect against taxes, but they can drastically streamline the probate process. When major assets like real property and financial accounts don’t have to pass through court, it may be possible to minimize court oversight and therefore the amount paid for probate proceedings. Additionally, trusts can be much more difficult for people to challenge when they are disappointed about an inheritance as compared to a will. They also give someone more control over what happens with their property after their death.

There are other means of reducing probate and tax risks. These might include arranging for certain assets to transfer to specific beneficiaries at the time of someone’s death or making gifts to individuals and organizations while someone is still alive. Taking a holistic approach to estate planning that addresses expensive concerns like probate court and taxes may benefit those hoping to provide significant resources for their loved ones.