Leaving A Legacy: When Wealth Changes Hands

You may have reached the age when you’re starting to think about what you’ll leave behind. Or maybe you’ve had the hard conversation with a loved one who may pass soon. The end of life is not an easy thing to face. But, the truth is, we should all spend some time thinking about the fact that we won’t permanently occupy space on this planet.

If you’re not familiar with the concept of the Great Wealth Transfer, check out our previous post for more details on why this shift matters.

And, for many of us, it’s important that we leave something behind to those we love. Of course, the most important thing we leave behind is our intangible legacy: our character, the stories we tell, the love we have shown. But, we also may hope to leave behind something of tangible value to our children, grandchildren, favorite charities, or other loved ones. If that’s the case, it’s a good idea to consider some of the practical matters involved in this process.

What Is An Inheritance Tax?

Inheritance tax is a tax on wealth that is being transferred from one individual to another after the time of death. More specifically, it’s a tax paid by the person who inherits the wealth. The good news for those of us who live in the great state of Texas is that there is no inheritance tax here—it was abolished in 2015.

However, if a loved one who is a resident of another state passes away and leaves you an inheritance, the inheritance will be subject to that state’s inheritance taxes. Be sure to do your research. But as of 2021, only seventeen states and Washington D.C. levy state inheritance taxes.

What Is An Estate Tax?

An estate tax is not the same thing as an inheritance tax, although they are very similar. An inheritance tax is imposed at the state level. An estate tax is imposed by the federal government.

According to the IRS, “The Estate Tax is a tax on your right to transfer property at your death.” Upon the time of a person’s death, the IRS will estimate the “current fair market value” of all assets including “cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.” This total number is called the “Gross Estate.” After this, certain deductions can be made for things like debt or estate administration costs and what remains is the “Taxable Estate.”

Here is what is most important: most estates will not reach the threshold needed in order to file an estate tax return. According to the IRS, “a filing is required if the gross estate of the decedent, increased by the decedent’s adjusted taxable gifts and specific gift tax exemption, is valued at more than the filing threshold for the year of the decedent’s death” (emphasis added). For those who pass away in the year 2025, for example, that minimum number of Taxable Estate value is $13,990,000.

This means if your collective estate value, minus deductions, is valued at less than $13.99 million, your loved ones will likely not have to file estate tax. Also, if the deceased is survived by a spouse who inherits the estate, usually that surviving spouse will not have to pay inheritance taxes. This means that any part of the overall taxable estate that is left to the spouse will be deducted from that total taxable estate, making it possible to avoid that estate tax threshold. Also, if both partners or spouses pass, that taxable estate threshold is doubled.

If you or your loved one’s estate (keep in mind, this is all assets, including real estate, minus deductions) is valued at higher than the exemption minimum ($13.99 million), only the amount that is over that threshold is taxed, and it is taxed at a scalable rate. This means, if a person’s estate is valued at less than $10,000 more than the $13.99 million-dollar exemption, that estate would be taxed at 18% of that $10,000.

From there, the rate increases, with the highest being for anything that is more than $1,000,001 over the tax exemption. In this case, the estate would be taxed $345,800 and 40% of the overage. It’s always a good idea to involve an accountant as well as legal counsel in preparing for these major transitions. They can offer you the most up-to-date advice and support as you or your loved one prepare to leave behind a legacy for those they love.

What About A Trust?

If you or a loved one hopes to leave behind a substantial estate that could be subject to estate taxes, it may be a good idea to investigate setting up a trust. There are many ways to set up a trust, and some of those ways might help you pass on wealth to a loved one without passing along the burden of paying hefty taxes.

From an Irrevocable Life Insurance Trust (ILIT) to an Intentionally Defective Grantor Trust (IDGT), there are many strategies you can use to set up the next generation for greater benefit and less of a tax burden. But setting up a trust is not a simple matter and should only be created with guidance from a trusted accountant or finance professional.

What About An Early Inheritance?

Early inheritance simply means passing along assets before the time of death. This can be a wonderful way to experience the joy of giving to the next generation during your lifetime. However, it is important to consider the ramifications of gift taxes when considering an early inheritance.

As of 2025, any gift valued at $19,000 or more must be reported to the IRS. However, if a married couple is giving the gift, that amount is doubled. That means the amount must be more than $38,000 in order to be required to report the gift to the IRS. Also important to note, it is the one doing the gifting who is required to report the gift to the IRS and pay the gift tax (if applicable), not the recipient.

Here’s where things get interesting. While you have to report any gifts valued at over $19,000, you do not have to pay gift taxes on these until you hit the lifetime exclusion. As of 2025, the lifetime exclusion amount is $13.99 million (double for a married couple). This means that, in theory, if you are married, you and your spouse could gift loved ones $38,000 a year for 368 years and not hit the lifetime exclusion.

Here’s another interesting exception: certain gifts are excluded altogether from the gift tax amount. For example, gifts given to a spouse are exempt from the gift tax limits as well as gifts specifically used for education expenses or medical expenses. These are meaningful ways one could benefit the next generation without incurring a tax burden either for yourself or for your loved ones.

Why Does This Matter?

One of the best gifts you can leave behind to the next generation is peace of mind. This means taking the time now to consider the best way to pass along an inheritance could save your loved ones vast amounts of money and stress after the time of your passing. No one wants to think about these moments. Yet, the more time and consideration you put into the transfer of assets, the more you leave behind a legacy of joy and peace to those you love.

Final Thoughts

Consult with a trusted financial partner today to find out how you can best prepare yourself or your loved ones for leaving a legacy. If you have specific questions regarding real estate investments for yourself or for the next generation, any of our knowledgeable agents at LEAGUE would be delighted to answer your questions. It’s never too late to think about leaving a legacy behind for the next generation.