Inheritance Tax Texas: Essential Guide to Maximize Your Legacy

Texas Has No State Inheritance Tax

Let’s start with the silver lining: Texas is one of nine states without a state-level inheritance tax or estate tax. This is a massive advantage for Texas residents and those with significant assets in the state. When someone passes away in Texas, their beneficiaries won’t face state taxes on inherited property, money, or assets. This distinction alone sets Texas apart from states like California, New York, and Florida, where estate taxes can significantly reduce what heirs receive.

This favorable tax environment exists because Texas legislators have consistently prioritized keeping wealth within families rather than transferring it to state coffers. It’s one reason many high-net-worth individuals choose to establish residency in Texas. However, the absence of state inheritance tax doesn’t mean you’re completely off the hook—federal taxes still apply if your estate exceeds certain thresholds.

Federal Estate Tax Basics

While Texas won’t tax your inheritance, the federal government might. The IRS imposes a federal estate tax on estates exceeding a certain value, and this is where most people need to focus their attention. The federal estate tax is essentially a tax on the transfer of wealth from one generation to the next when the total value exceeds the exemption limit.

The federal estate tax rate is a flat 40% on amounts above the exemption threshold. That’s substantial. If you have a $10 million estate and the exemption is $13.61 million (2024 figures), you’re safe. But if your estate is $20 million, the IRS could claim 40% of the $6.39 million overage—nearly $2.56 million in taxes. Understanding these numbers helps you see why planning matters so much.

It’s important to note that federal estate tax applies to U.S. citizens and residents, regardless of where they live. Texas residents with significant estates need federal planning just as much as residents of high-tax states. The key difference is that Texas residents don’t face an additional state-level burden on top of federal taxes.

Current Exemption Thresholds

The federal estate tax exemption is the amount your estate can be worth before federal taxes apply. In 2024, the exemption stands at $13.61 million per individual, or $27.22 million for married couples filing jointly. This is a significant cushion for most families, but it’s critical to understand that this exemption is temporary.

Here’s what makes this tricky: These elevated exemption amounts are set to expire on December 31, 2025. When that sunset provision kicks in, the exemption will drop to approximately $7 million per person (adjusted for inflation), unless Congress acts to extend or modify the law. This creates a planning urgency for anyone with a substantial estate. If you have $15 million today and do nothing, your heirs could face significant federal taxes after 2025.

This is why working with a tax professional or financial advisor isn’t optional—it’s essential. You need to understand where your estate stands relative to these thresholds and plan accordingly. Some families benefit from gifting strategies, trust structures, or other techniques to minimize exposure to federal estate taxes before the exemption shrinks.

Smart Planning Strategies

Now that you understand the tax landscape, let’s talk about how to protect your legacy. Several strategies can help you minimize federal estate taxes and ensure your wealth transfers smoothly to your heirs.

Annual Exclusion Gifts: You can gift up to $18,000 per person per year (2024) without using any of your lifetime exemption. For married couples, that’s $36,000 per recipient annually. Over time, this strategy can significantly reduce your taxable estate.

Irrevocable Life Insurance Trusts (ILITs): Life insurance proceeds are typically included in your taxable estate, but an ILIT can remove them from your estate entirely. This keeps the death benefit out of the federal tax calculation while still providing liquidity for your heirs.

Charitable Remainder Trusts (CRTs): If you’re charitably inclined, a CRT allows you to receive income during your lifetime while the remainder goes to charity. This reduces your taxable estate and provides a charitable deduction.

Spousal Lifetime Access Trusts (SLATs): These trusts allow you to gift assets to your spouse (through a trust) while maintaining access to those assets. It’s a sophisticated strategy that requires careful structuring but can be highly effective for high-net-worth couples.

Each strategy has different requirements and tax implications. What works for one family might not work for another. This is why personalized planning with a qualified tax professional is invaluable.

Probate and Asset Transfer

Beyond taxes, understanding how assets transfer after death is crucial. In Texas, probate is the legal process where a court oversees the distribution of your estate. Texas probate is generally simpler and faster than in many other states, but it’s still a process that takes time and money.

Probate costs typically include court filing fees, attorney fees, and executor compensation. These costs don’t directly relate to inheritance tax, but they reduce what your heirs ultimately receive. In Texas, probate can often be avoided or simplified through proper planning.

Non-probate transfers move assets directly to beneficiaries without court involvement. These include assets with designated beneficiaries (retirement accounts, life insurance), joint tenancy property, and assets in trusts. These transfers happen outside probate and can be much faster and less expensive.

For Texas residents, understanding which assets pass through probate and which don’t is essential. A well-structured plan ensures that assets transfer efficiently, minimizing delays and costs for your heirs. This is where proper documentation and beneficiary designations become critical.

Beneficiary Designations Matter

Your beneficiary designations on retirement accounts, life insurance policies, and transfer-on-death accounts override your will. This is powerful, but it’s also a common source of mistakes. Many people update their wills but forget to update beneficiary designations, leading to unintended consequences.

Imagine this scenario: You divorce, remarry, and update your will to benefit your new spouse. But you forget to update the beneficiary on a $500,000 life insurance policy, which still names your ex-spouse. Your ex-spouse gets the insurance proceeds, regardless of what your will says. This happens more often than you’d think.

Texas law allows you to designate beneficiaries on most financial accounts. Review these designations at least every three to five years or whenever your life circumstances change. Make sure they align with your overall estate plan and your current wishes. If you’ve experienced major life changes—marriage, divorce, births, deaths—it’s time to review these designations immediately.

Trust Structures for Protection

Trusts are powerful tools for managing your estate and protecting your legacy. A trust is a legal arrangement where you (the grantor) transfer assets to a trustee to manage for the benefit of your beneficiaries. Trusts can accomplish several things simultaneously: reduce taxes, avoid probate, maintain privacy, and protect assets from creditors.

Revocable Living Trusts: These are flexible trusts you can modify or revoke during your lifetime. They avoid probate, maintain privacy (trusts aren’t public records like wills), and allow you to manage your affairs if you become incapacitated. They don’t reduce federal estate taxes, but they provide significant practical benefits.

Irrevocable Trusts: Once you fund an irrevocable trust, you generally can’t change it. The tradeoff is that irrevocable trusts can reduce your taxable estate, potentially saving significant federal estate taxes. They’re more restrictive but more powerful for tax planning.

Dynasty Trusts: Texas allows dynasty trusts (also called perpetual trusts) that can benefit multiple generations indefinitely. These sophisticated structures can preserve wealth for your descendants while minimizing taxes across generations.

Trust structures require careful consideration. The right structure depends on your goals, your family situation, and your assets. Working with an experienced estate planning attorney in Texas is essential to ensure your trust is properly drafted and funded.

Avoid These Common Mistakes

After years of helping clients with estate planning, I’ve seen patterns in what goes wrong. Here are the most common mistakes Texas residents make with their inheritance planning:

Mistake #1: Doing Nothing: The biggest mistake is assuming you don’t need a plan because you don’t think you’re wealthy enough. Even modest estates benefit from proper planning. Without a plan, your family faces probate, potential disputes, and unnecessary costs.

Mistake #2: Outdated Documents: A will or trust created 15 years ago might not reflect your current wishes, family situation, or tax laws. Life changes; your documents should too. Review your estate plan every three to five years at minimum.

Mistake #3: Ignoring the 2025 Exemption Sunset: Many people don’t realize the federal exemption is dropping significantly in 2026. If you have a substantial estate, you should implement strategies before the exemption shrinks. This window is closing.

Mistake #4: Mismatched Beneficiaries: As mentioned earlier, outdated beneficiary designations cause real problems. Your will might say one thing, but your life insurance policy says another. The policy wins.

Mistake #5: Funding Trusts Incorrectly: A trust only works if you actually transfer assets into it. Many people create trusts but never fund them, leaving assets in their personal name. This defeats the purpose of the trust.

Mistake #6: Not Considering Incapacity: Estate planning isn’t just about what happens after death—it’s also about what happens if you become incapacitated. A durable power of attorney and healthcare directive are just as important as your will.

Frequently Asked Questions

Does Texas have an inheritance tax?

No. Texas does not impose a state-level inheritance tax or estate tax. Your heirs won’t pay Texas taxes on inherited assets. However, federal estate taxes may apply if your estate exceeds the federal exemption threshold ($13.61 million per person in 2024).

What’s the difference between an inheritance tax and an estate tax?

An inheritance tax is paid by the person receiving the inheritance, while an estate tax is paid by the estate itself before assets are distributed. Texas has neither. The federal government has an estate tax, not an inheritance tax.

How much can I gift to my children without taxes?

You can gift up to $18,000 per person per year (2024) without any tax consequences or paperwork. If you’re married, you can gift $36,000 per recipient annually. Gifts beyond this amount use your lifetime exemption but don’t result in immediate taxes.

Do I need a will or a trust in Texas?

You need at least one. A will is essential because it names a guardian for minor children and specifies your wishes. A trust provides additional benefits like avoiding probate and maintaining privacy. Many people benefit from having both.

What happens if I die without a will in Texas?

Texas intestacy laws determine how your assets are distributed. Generally, your spouse and children inherit, but the exact distribution depends on how many heirs you have. Without a will, your family also faces probate court proceedings, which are time-consuming and costly.

When should I start planning my estate?

Now. Regardless of your age or wealth level, estate planning should be part of your financial strategy. If you have minor children, a spouse, significant assets, or own a business, estate planning is especially important. Don’t wait for a health crisis or life emergency.

How often should I review my estate plan?

At least every three to five years, or whenever major life changes occur (marriage, divorce, birth, death, significant increase in assets, relocation). Tax law changes regularly, and your personal circumstances evolve. Your documents should reflect current laws and your current wishes.

Can I avoid probate in Texas?

Yes. Assets in a trust, accounts with designated beneficiaries, joint tenancy property, and transfer-on-death accounts all avoid probate. A properly structured plan can keep most or all of your assets out of probate court.