Understanding Inheritance Tax in Texas

For many Texans, safeguarding wealth for future generations is a key priority. Understanding inheritance and estate tax rules is an important part of planning your legacy, helping protect your loved ones and provide peace of mind.

While Texas has the advantage of no state-level inheritance or estate tax, federal obligations can still apply. This guide explains the essentials and highlights why thoughtful planning matters.

NO STATE-LEVEL INHERITANCE TAX OR ESTATE TAX IN TEXAS

Texas stands out for its tax-friendly legacy planning. The state does not impose an inheritance tax – which is collected from beneficiaries after a death – nor does it enforce a state estate tax, which applies to the deceased’s estate before distributions.

In fact, Texas formally repealed its inheritance tax in 2015. That means beneficiaries in Texas generally inherit assets tax-free at the state level.

FEDERAL ESTATE TAX: WHEN DOES IT APPLY?

Even though Texas does not impose state-level taxes, large estates may still be subject to the federal estate tax, which applies before assets are transferred to heirs.

As of 2025, the federal estate tax exemption is $13.99 million per individual, with portability rules allowing married couples to combine exemptions. Estates that exceed these thresholds could face taxation on the amount above the exemption.

WATCH OUT FOR ASSETS IN OTHER STATES

One important consideration: if you inherit property located in another state, those assets may be subject to that state’s inheritance or estate tax rules. For instance, a vacation home in Pennsylvania or Maryland could trigger state taxes for beneficiaries, even if the deceased lived in Texas.

This highlights why it’s essential to account for multi-state assets when planning your estate.

HOW INHERITANCE IS TAXED AT THE FEDERAL LEVEL

While inheritances themselves are not typically taxed as income to beneficiaries, there are important exceptions to understand. The way inherited assets are structured can have a big impact on how much tax your heirs may owe.

Distributions from traditional IRAs, 401k plans and similar tax-deferred accounts are generally subject to income tax when beneficiaries withdraw funds. The SECURE Act requires most non-spouse beneficiaries to withdraw the full balance within 10 years, which can accelerate taxable income. Spouses, however, may have more flexibility and can often roll the account into their own IRA.

• Roth IRAs: Roth accounts typically pass to heirs income tax-free, as long as the original account has met the five-year holding requirement. Beneficiaries still must withdraw funds within the required timeframe, but distributions are not taxed.
• Estate-generated income: If an estate earns money after the decedent’s death but before distribution to estate beneficiaries – such as rental income from real estate, interest or dividends from investments – that income is taxable to either the estate or the beneficiaries, depending on how and when it is distributed.
• Capital gains: Beneficiaries usually benefit from a cost basis adjustment on inherited assets like real estate or stocks. This means the value of the asset is reset to its market value at the time of the original owner’s death. When the heir sells the asset, capital gains are calculated based on this new stepped-up value, which can significantly reduce taxable gains.
• Life insurance: Proceeds from life insurance are typically not subject to income tax for beneficiaries. However, they may be included in the deceased’s taxable estate if the policy was owned by the decedent, potentially triggering federal estate tax if the estate exceeds exemption limits.

Understanding these distinctions is key to avoiding surprises. With the right planning, you can structure inheritances in a way that minimizes taxes for your heirs and keeps more of your wealth in the family.

STRATEGIES TO HELP PROTECT YOUR LEGACY

Even though Texas doesn’t impose inheritance or estate taxes, strategic planning remains essential. Families that plan ahead are often better able to preserve wealth, reduce stress for heirs and maintain control over how assets are distributed. Consider the following approaches:

• Revocable living trusts can streamline transfer and help avoid probate.
• Dynasty trusts offer long-term protection by shielding assets across generations with safeguards like spendthrift provisions.
• Strategic gifting can reduce the size of your estate before death. The IRS allows annual gifts of up to $19,000 per recipient in 2025 without affecting your lifetime exemption. Over time, these gifts can significantly reduce your taxable estate while supporting loved ones sooner.
• Charitable giving can be a powerful tool. Donating to qualified charities during life or at death can reduce the size of your taxable estate and provide meaningful support to causes you care about. Options include donor-advised funds and charitable remainder trusts.
• Life insurance planning may help provide liquidity for estate taxes or other expenses. Structured correctly, life insurance can also transfer wealth to heirs outside of probate and, in some cases, outside of the taxable estate.
• Family limited partnerships or LLCs can consolidate business or investment assets, making it easier to manage succession planning while potentially reducing estate tax exposure.
• Out-of-state holdings should be reviewed carefully to anticipate potential state tax exposure if you own property outside of Texas.

Coordinating with financial, legal and tax professionals can help ensure your estate plan remains aligned with both your goals and evolving laws.

BEYOND TAXES: THE BROADER VALUE OF ESTATE PLANNING

Estate planning isn’t just about minimizing taxes – it’s about laying the foundation for smooth transitions and preserving your family’s vision, including:

• Avoiding probate delays and costs
• Ensuring guardian designations for minor children are clearly assigned
• Preventing family disputes over assets
• Supporting special-needs beneficiaries with tailored planning
• Protecting family businesses and ensuring leadership transitions are clear

KEEPING YOUR WEALTH WORKING FOR YOU

Legacy planning should be both strategic and purposeful. In Texas, the absence of state inheritance and estate taxes gives families a valuable safety net. Yet, federal estate taxes and multi-state complexities still require thoughtful planning.

If you're aiming to protect generational wealth, simplify transitions or build a lasting legacy, our team can help.