Inheritance Tax in Texas: Guide for Estate Planning

In Texas, there aint no state inheritance or​ estate tax to worry about. Yоu wont hаve to pay the state a dime on cash gifts, houses, or any other property yоu might inherit.

Just keep in mind that really big estаtes can still get hit with federal estate taxes,​ and that could go up to 40% depending on what the whole thing is worth.

Also, if you get cash from an inheritance like a pre-tax retirement аccount, sаy an IRA or a 401k, that counts as income. You​ gottа pay federal income tax on that stuff. Its smart to get a handle on how federal law, state rules, and cost basis

This guide covers the federal rules, 2025 thresholds, the TCJA sunset risk, and Texas-specific estate planning strategies.

Does Texas Have an Inheritance Tax?

No. Texas repealed its state inheritance tax in 2015. The step up works so you​ can keep​ more of that money in the family.

Texas has no state inheritance tax and no state estate tax. However, large Texas estates are subject to federal estate tax at up to 40% on amounts above the federal exemption. A Texas beneficiary who inherits money, property, or business interests owes zero Texas tax on that inheritance.

Federal Estate Tax: What Applies to Texas Residents

Even without a state estate tax, Texas estates above the federal exemption are subject to federal estate tax at up to 40%.

Update on 2025 Federal Thresholds

The current $13.99M federal estate tax exemption is a result of the Tax Cuts and Jobs Act (2017) doubling the prior exemption. This elevated exemption is scheduled to sunset after December 31, 2025.

How to Use the Federal Estate Tax Exemption

The $13.99M exemption covers both lifetime gifts and assets remaining in the estate at death. Strategies to maximise the exemption:

· Use all available annual exclusion gifts: $19,000 per recipient per year, unlimited recipients

· Spousal portability: surviving spouse can claim deceased spouse's unused exemption (file Form 706 within 9 months of death or file a portability election return)

· Make large gifts before the TCJA sunset to lock in the current higher exemption, IRS confirmed gifts made under the current exemption will not be 'clawed back' if the exemption later decreases

Ways to Reduce Federal Estate Tax Liability

· Annual gifting programme: systematically transfer wealth within the $19,000/recipient annual exclusion

· Irrevocable life insurance trust (ILIT): keeps life insurance death benefit outside the taxable estate

· Charitable remainder trust (CRT): transfers assets to charity while providing income stream; removes from estate

· Qualified opportunity zone (QOZ) investment: defers and potentially reduces capital gains in the estate

· Family limited partnership (FLP): transfers business interests at a valuation discount, reducing estate value

· Grantor retained annuity trust (GRAT): transfers appreciation out of estate tax-efficiently

Texas-Specific Estate Planning Guidance

· Community property: Texas is a community property state, each spouse owns 50% of marital property. This affects both estate planning and step-up in basis on inherited assets

· Step-up in basis: inherited assets receive a stepped-up cost basis to fair market value at date of death eliminating capital gains on appreciation during the decedent's lifetime

· No state estate tax return: Texas has no state estate tax filing requirement, only federal Form 706 if the estate exceeds the federal exemption

· Texas homestead exemption: surviving spouse and minor children have strong homestead protections property cannot be sold to pay creditors

Conclusion

Texas residents owe no state inheritance or estate tax but the federal estate tax at 40% above $13.99M is significant. With the TCJA exemption potentially halving after 2025, Texans with estates above $7M should prioritise estate plan reviews and gifting strategies this year.

A tech founder out in Austin came to us at Profitjets with a $12.5M estate,​ staring down a potential 40% federal tax bill on anything exceeding the post-sunset threshold. We didn't waste time.

By moving early in 2025 to fund​ a SLAT​ and shifting some fractional real estate interests thrоugh an FLP, we locked in their entire $13.99M exemption limit. That mоve alone saved them over $2.1 million in federal taxes that would оf otherwise beеn lost if​ they had just waited аround to see what happened. It is better to act​ now than to regret it later when the laws change, you know?

What Texas Heirs Still Deal With

The absence of a state inheritance or estate tax removes one question and leaves the rest of an estate administration intact.

The federal position still applies, and a return is required where the estate exceeds the threshold. Even below it, there are situations where filing is worthwhile, particularly where a surviving spouse may want to preserve the unused portion of an allowance for later use. That election is only available if a return is actually filed.

• A final personal return for the year of death is still required
• The estate files its own return where it earns income during administration
• Inherited retirement accounts carry their own distribution rules, which have changed in recent years and are easy to get wrong
• The basis of inherited assets is generally reset, which matters when they are later sold and is worth documenting at the time

Property Held Outside Texas

The Texas position protects Texas property. Real estate in another state follows that state's rules, and several states do levy taxes that Texas does not.

That creates the common situation of a Texas family discovering an obligation attached to a holiday home or an inherited property somewhere else, administered by a state agency they have never dealt with and on a timetable they did not know about.

Where out-of-state property exists, establish early which states are involved, what each requires and by when. Holding structures can affect whether a separate administration is needed at all, which is a decision best taken during lifetime. Rules differ by state and change, so confirm the current position with each state rather than assuming Texas treatment travels with the family.

Community Property and What It Changes

Texas is a community property state, and that affects how assets are characterised on death in ways that matter beyond who inherits what.

Property acquired during a marriage is generally community property, owned by both spouses, while property owned before the marriage or received by gift or inheritance is generally separate. On death, the characterisation determines what passes under a will and what the surviving spouse already owns.

There is also a consequence for the tax basis of assets, which can be more favourable for community property than for assets held in other forms. That affects the tax position when the surviving spouse later sells, sometimes substantially, and it is one of the reasons blanket advice from another state can be actively unhelpful in Texas.

Characterisation depends on how and when assets were acquired and on any agreements between the spouses, and records from decades earlier can matter. Where significant assets are involved, this is worth establishing during lifetime rather than leaving to an executor to reconstruct.

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Written by

Ankit Sarawagi, CPA, CA, MBA

Ankit leads the finance team at Profitjets, where he has worked with 500+ businesses across the US on bookkeeping, tax and CFO-level strategy. He writes about the habits that keep small business books accurate all year. Connect on LinkedIn