Inheriting property or assets can bring both emotional and financial complexities. In Texas, the good news is that the state does not impose an inheritance tax.
But what does this mean for you and your family?
Let’s explore the implications, including potential scenarios involving other state’s taxes and federal estate taxes.
Inheriting property or assets from a loved one can be a bittersweet experience because it can raise concerns about tax liabilities, specifically inheritance tax, sometimes referred to as ‘death tax.’
This should not be confused with estate tax, which is levied on the deceased’s estate before the assets are distributed to heirs. Fortunately, Texas is known for its favorable tax environment, especially when it comes to inheritance.
However, there are nuances and federal estate tax laws that you may need to consider.
In this article, we walk you through everything you need to know about inheritance tax, including potential federal taxes, probate issues, gift tax, estate tax exemption, and what happens if the deceased lived or owned property in other states.
_________________________________________________________________
Did you inherit property or other assets from a loved one? Understand your tax obligations before the tax season opens. Call us today to discuss your obligations with Hall Accounting Company’s seasoned tax professionals.
_________________________________________________________________
What is inheritance tax?
Before delving into Texas inheritance tax laws, it’s important to understand the basic concept of inheritance tax. This tax is levied on the beneficiaries of an estate based on the value of what they inherit. Unlike an estate tax liability, which is charged to the estate itself, inheritance taxes directly affect the recipients.
Does Texas have an inheritance tax?
The short answer is no. Texas is one of the few states that does not impose this tax. The state repealed its Texas inheritance law in 2015 and hasn’t looked back since.
This is great news for Texas residents, as it means that, regardless of the value of the inheritance, beneficiaries are not required to pay any state-level inheritance tax.
This favorable tax environment is part of what makes Texas an attractive place to live and pass on wealth.
Whether you’re inheriting property, cash, or other valuable assets, the lack of an inheritance tax can help families keep more of what’s passed down through generations as you reduce the total tax burden.
What about the federal estate tax?
Unfortunately, beneficiaries may still be liable for federal government taxes on inheritance. The federal estate tax is a levy on the total value of the deceased’s estate, including real estate, stocks, bonds, and other assets.
For most people, this won’t be an issue, as the federal estate tax only applies to estates that are valued over a certain threshold.
As of 2024, that threshold is $13.61 million for individuals.
This means that if the estate's total value is below this amount, no federal estate tax is due. However, if the estate exceeds that value, any amount above the threshold will be subject to federal estate tax rates of up to 40%.
It’s also worth noting that married couples can combine their exemptions, meaning they can pass on nearly $25 million to their heirs without triggering federal estate taxes.
These kinds of issues are best planned for years before your heirs inherit assets through the process of estate planning.
Estate tax planning allows you to anticipate your taxable estate and make provision for it. Both you and your heirs will understand years in advance what the federal law says, reducing the shock of sudden tax payments.
_________________________________________________________________
If you haven’t looked into estate tax planning, now is the time. Call us today to prevent unpleasant tax surprises for your heirs in the years to come. Safeguard their inheritance now.
_________________________________________________________________
What happens if the deceased owned property in other states?
Property tax laws for other states vary, and you may not be subject to Texas estate tax, but this isn’t the case if the property you inherit is in another location.
States like Maryland, New Jersey, and Pennsylvania are known for having stiff inheritance taxes. If the property in those states is passed down to heirs, the beneficiaries may be required to pay the property taxes of that state.
For example, let’s say you inherit a property that was a vacation home in Maryland. While you won’t face any inheritance tax in Texas, you will likely owe taxes in Maryland on the value of the inherited home.
Does Texas have an estate tax?
Texas does not impose an estate tax. The state repealed its estate tax after a significant change in federal law in 2005. Texas used to collect a ‘pick-up’ tax, which essentially piggybacked on the federal estate tax system. However, once federal law was altered to phase out this state-level tax credit, Texas no longer collected these taxes.
Navigating probate in Texas
In Texas, families still need to go through the probate process when settling a deceased person’s estate. Probate is the legal procedure in which a deceased person’s estate is distributed to heirs and beneficiaries.
It involves validating the deceased’s will, settling any debts, and distributing the remaining assets.
Texas has a reputation for being a ‘probate-friendly’ state. Many people opt for independent administration, where the executor of the will can handle the process with minimal court supervision. This saves both time and legal costs. However, if someone dies without a will, the estate is considered ‘intestate.’ In such cases, Texas law will determine who inherits what, which can lead to more complicated legal processes.
Gifting strategies to reduce federal estate taxes
One way Texans can potentially avoid federal estate tax is through gifting. However, this is a process that needs a professional to help you. Under current tax laws, individuals can give away up to $17,000 per person per year without it counting toward their lifetime exemption limit. For example, if you’re a parent with three children, you could give each of them this amount per year without it having tax implications.
By gifting assets gradually, high-net-worth individuals can reduce the size of their estate and lower their federal tax liability after their death.
Other estate planning strategies
Trusts
Setting up a revocable or irrevocable trust is a common way to manage asset distribution while reducing tax exposure. An irrevocable trust, in particular, removes assets from the taxable estate, helping to lower the estate’s value.
Charitable Contributions
Donations made to qualifying charities can reduce the taxable value of an estate, which may bring it below the federal threshold. Charitable trusts or direct donations are common tools used to achieve this goal.
How does community property affect inheritance in Texas?
Texas is a community property state, meaning that spouses consider any assets acquired during marriage equally owned.
Upon the death of one spouse, half of the community property automatically belongs to the surviving spouse, and the other half can be distributed according to the will or intestate laws.
This is an important consideration for anyone dealing with inheritance and estate planning in Texas. If you’re married, it’s important to understand how community property laws affect what your spouse and other beneficiaries may receive after your death.
_________________________________________________________________
Safeguard your spouse and other beneficiaries from unnecessary estate tax obligations. Call us today and speak to one of our senior tax associates.
_________________________________________________________________
The benefits of discussing your estate tax obligations with Hall Accounting Company
Throughout this article, we’ve alluded to the complexities associated with estate and inheritance taxes for beneficiaries of property, as well as other assets, after the death of a loved one.
If you’re planning to leave your loved ones a sizable inheritance, whether in Texas or another state, then planning for the future is best done now! There are a number of reasons for discussing the future implications of an estate with professionals. Here, we share some of the insights you can get from consulting with us.
You can minimize federal estate tax liability by understanding the implications for your heirs and making plans to minimize the taxes they will pay.
We can help you set up the right type of trust to meet specific goals, such as protecting wealth for future generations while minimizing taxes.
We can give you insight into gifting strategies that will allow you to reduce the size of your estate and may help you reduce sizable federal estate taxes.
We will help you navigate through multi-state inheritance laws.
If you currently find yourself in a situation where you need to meet inheritance or estate tax obligations and have no idea where to start, you can call us today, and we will steer you in the right direction. For personalized advice on managing your estate and minimizing tax liabilities, consider our tax planning services in Dallas
We hope this short discussion about inheritance tax has given you some insight into this topic and set you on the right path.
Until next time, when we discuss more relevant and important tax topics.
__________________________________________________________________
Tax season will soon be upon us again! Don’t let your tax return stress you out. The Hall Accounting Company tax team is gearing up to help all individual and business tax clients in 2025. Call us now, and begin your tax preparation early.