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When you think about estate planning, your focus is on protecting your assets and providing for loved ones. But just as important is this question: what happens to those assets once they’re inherited? More specifically, will your beneficiaries face a tax burden they weren’t expecting?
In Texas, there’s no state inheritance tax. And most families will never owe federal estate tax, thanks to generous exemption limits. But that doesn’t mean beneficiaries are entirely off the hook. From income tax on inherited retirement accounts to capital gains on appreciated property, there are real tax consequences that can catch families by surprise. Here’s what to know and how to plan ahead.
No Inheritance Tax in Texas? That’s the Good News.
Let’s start with what you don’t have to worry about. Texas does not impose a state inheritance or estate tax. That means if you’re a resident of Texas, your estate won’t be taxed by the state when you pass away, and neither will the people who inherit from you.
At the federal level, the estate tax only applies to estates valued above $13.61 million per person in 2024. For married couples, that number is effectively doubled. So, unless your estate is substantial, the federal estate tax probably won’t apply either.
But that doesn’t mean inheritance is automatically tax-free. The real impact often comes later, when your beneficiaries try to use, sell, or withdraw the assets they’ve inherited.
Income Taxes Still Apply to Certain Inherited Assets
Most people are relieved to learn that cash inheritances aren’t treated as income. If your children inherit $50,000 from your bank account, they won’t owe income tax on that money. However, if they inherit income-producing assets, the story changes.
Let’s say you leave behind a rental property, a brokerage account, or a traditional IRA. Once your beneficiary starts collecting rent, selling stocks, or withdrawing from a retirement account, those activities could trigger taxable events. The type and timing of the inheritance matter, and so does what your beneficiary does with it after your passing.
The Step-Up in Basis: A Helpful Tax Rule
A rule that often works in your beneficiaries’ favor is the step-up in basis for appreciated assets like real estate or stocks that have gone up in value since you purchased them. When you die, the cost basis of those assets is “stepped up” to their market value at the time of your death. That means your heirs won’t owe capital gains tax on the appreciation that happened during your lifetime.
For example, if you bought a home for $100,000 and it’s worth $300,000 when you pass away, your child’s new tax basis is $300,000. If they later sell it for that amount, they wouldn’t owe any capital gains tax. If they sell it for more, they’d only be taxed on the gain above $300,000.
This rule helps protect families from being taxed on decades of appreciation. But it doesn’t apply to assets you gift during your lifetime—another reason to talk to a professional before transferring ownership.
Inherited Retirement Accounts Can Be a Tax Trap
One area where taxes definitely come into play is with inherited IRAs or 401(k)s. These accounts are funded with pre-tax dollars, so distributions are treated as ordinary income when withdrawn.
Under the SECURE Act, most non-spouse beneficiaries must withdraw the entire balance of an inherited retirement account within 10 years. This can result in large, taxable distributions, particularly if your beneficiary is already earning a substantial income.
In some cases, those required withdrawals can push your heirs into a higher tax bracket, creating a larger tax bill than expected. Planning for this scenario now can help soften the impact later.
Planning Ahead Makes a Big Difference
The best way to prepare your beneficiaries is to work with an estate planning attorney—and possibly a tax advisor—to ensure your plan accounts for potential tax consequences.
Strategies may include:
- Converting traditional IRAs to Roth IRAs during your lifetime
- Using trusts to control distributions and manage timing
- Leaving tax-heavy assets to charities instead of individuals
- Educating your heirs about what they’re inheriting and how taxes work
The right approach depends on your goals, your assets, and your family’s situation. But one thing is universal: no one wants their legacy to turn into a financial headache for their loved ones.
Fort Worth Estate Planning Lawyers
Most families in Texas won’t face estate or inheritance tax, but that doesn’t mean taxes aren’t part of the equation. Income tax, capital gains, and distribution rules can all come into play, depending on what you leave behind and how it’s structured.
At The Law Office of Carey Thompson, PC, we help individuals and families across Fort Worth and the surrounding areas build thoughtful, tax-aware estate plans. Let us work with you to protect your legacy and your loved ones’ financial future. Contact us today to schedule a consultation and start planning with confidence.