When people start thinking about estate planning, one question often comes up:
“Will my kids have to pay taxes on what I leave them?”
Around here in the Texas Hill Country, we hear that concern from families who own everything from a family home in town to ranch land, mineral interests, retirement accounts, small businesses, or investment property. The answer isn’t always straightforward because different assets can be treated differently after death.
Most folks are relieved to hear one important piece of news right away: there is currently no inheritance tax in Texas. Texas also does not impose a state estate tax. But that doesn’t necessarily mean taxes disappear from the conversation entirely.
A tax is a tax, but not all taxes work the same way. When people hear terms like inheritance tax, estate tax, capital gains tax, and income tax, they’re often lumping very different rules into one bucket.
Understanding how these rules work can help reduce the future tax burden on your loved ones and help you make more informed planning decisions.
Does Texas Have an Inheritance Tax?
Let’s start with the question Texans ask most often.
Texas does not have a state inheritance tax, and it also does not impose a state-level estate tax.
That means if your children inherit property, cash, or other assets from you, they generally won’t owe a Texas tax simply because they inherited something.
However, inheritance or estate tax issues can still arise at the federal government level for certain large estates, and income taxes or capital gains taxes may still affect specific assets.
Understanding the difference matters.
Will Federal Estate Taxes Apply?
There are three things no one can predict with certainty:
- When someone will pass away
- What their assets will be worth at that time
- What the federal estate tax exemption amount will be in the future
For 2026, federal estate taxes generally apply only to estates exceeding $15 million for an individual or $30 million for married couples.
For many families in Llano County and throughout the Texas Hill Country, that means federal estate taxes may never become an issue.
But some families are surprised by how quickly assets can add up:
- Ranch land
- Family homes and real estate
- Retirement accounts
- Life insurance proceeds
- Businesses
- Investment accounts
- Mineral interests
Even if cash in the bank seems modest, total asset values can grow significantly over time.
For married couples in particular, reviewing and updating planning after the death of the first spouse can be important to preserve the available exemption amount and maximize tax advantages.
For current federal estate tax information, the IRS maintains guidance here: IRS Estate Tax Information
Cash and Bank Accounts: Usually the Simple Answer
Cash accounts often create the least confusion.
If you leave a beneficiary money in checking, savings, or money market accounts, they generally receive those funds without paying federal income tax on the principal balance.
If a savings account continues earning interest after death but before distribution, that interest may become taxable income to the recipient and could appear on future tax returns.
Otherwise, inherited cash is typically one of the simpler assets to receive.
Investment Accounts and Real Estate: Understanding the Step-Up in Basis
One of the most valuable tax benefits in estate planning is called the step-up in basis.
Here’s a simplified example.
Suppose years ago you purchased stock for $10,000 and by the time of your death it’s worth $100,000.
If your beneficiary inherits it, their basis usually resets to the fair market value at your death. If they immediately sell for that amount, they may owe no capital gains taxes on the appreciation that happened during your lifetime.
This same principle can affect certain real estate as well.
That can become important when families inherit:
- Ranch property
- Hunting land
- Family homes
- Investment property
- Mineral interests
Understanding these rules can influence decisions about gifting assets versus holding them and transferring property later through an estate plan.
Sometimes keeping appreciated assets until death can actually result in better tax treatment than gifting them during life.
Retirement Accounts Can Be More Complicated
Retirement accounts such as traditional IRAs and 401(k)s are a different story.
Unlike some inherited assets, these accounts typically do not receive a step-up in basis. Instead, beneficiaries often owe ordinary income taxes on distributions.
The tax rates paid depend on the recipient’s own income situation.
The SECURE Act also changed distribution rules for many inherited retirement accounts. In many situations, non-spouse beneficiaries now must withdraw inherited retirement funds within ten years.
This can create challenges because large distributions over a shorter period can potentially push someone into higher income tax brackets.
Spouses generally have more flexibility and may be able to roll inherited retirement assets into their own accounts.
Roth IRAs can work differently because qualified distributions are generally income-tax-free.
Life Insurance Is Usually Income-Tax Free
Life insurance benefits generally pass to beneficiaries without income tax consequences.
However, for very large estates, policy ownership matters.
If the policy owner and insured are the same person, proceeds may still be counted as part of a taxable estate for estate-tax purposes.
This doesn’t affect most families, but for larger estates, planning strategies may help with minimizing tax exposure.
Good Estate Planning Isn’t Just About Avoiding Taxes
Many people assume estate planning is only about reducing taxes.
For most Texas families, taxes aren’t actually the biggest concern.
More often, people want to:
- Keep family conflict to a minimum
- Avoid unnecessary probate complications
- Make sure assets go where intended
- Protect children
- Provide clear instructions
- Reduce stress during a difficult season
The reality is that good planning is usually less about avoiding an inheritance or estate tax and more about helping the people you care about have clarity when they need it most.
Our process looks beyond documents alone. We help families think about what they own, how assets work together, and how different decisions today may affect loved ones later.
Tax laws change. Families change. Asset values change too.
Working with an estate planning attorney can help ensure your plan continues working the way you intended.
Don’t leave your loved ones sorting through unanswered questions later.
Click here to schedule a complimentary 15-minute introductory call and learn how we can help support your family and future.
This material was created by Packsaddle Law PLLC for educational and informational purposes only. It is not intended as tax, legal, or investment advice. For legal advice tailored to your specific situation, please consult a qualified attorney.