Community Property Step-Up Estimator
Texas Estate Planning Guide
Texas Proposition 8 (2015) -- Constitutional Estate Tax Ban
In November 2015, Texas voters overwhelmingly approved Proposition 8, a constitutional amendment that permanently prohibits the state from levying any tax on a decedent's estate. The amendment added Article VIII, Section 1-e to the Texas Constitution, which reads:
"No tax or fee may be imposed on the estate of a decedent to be collected from the estate or from the beneficiaries of the estate."
History of Estate Taxation in Texas
Texas never had an independent state estate tax in the modern sense. Like many states, Texas imposed a "pick-up" or "sponge" tax that was calculated as the maximum credit allowed against the federal estate tax under former IRC Section 2011. This meant the state tax effectively cost estates nothing extra -- it simply redirected a portion of what would have been paid to the IRS to the state of Texas instead.
In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which phased out the federal state death tax credit between 2002 and 2005, replacing it with a deduction. When the credit disappeared, the Texas pick-up tax automatically fell to zero because the tax was defined by reference to the federal credit amount.
From 2005 to 2015, Texas had no functioning estate tax, but the statutory authority technically remained on the books. Proposition 8 eliminated any possibility that the legislature could revive it without another constitutional amendment approved by voters.
What This Means for Estate Planning
- No state estate tax at any level. Unlike New York ($6.94M threshold), Massachusetts ($2M), or Oregon ($1M), Texas imposes zero estate tax regardless of estate size.
- Cannot be changed by the legislature alone. Because the ban is in the Constitution, restoring an estate tax would require passage of a joint resolution by two-thirds of both chambers of the Texas Legislature, followed by majority approval in a statewide referendum.
- No inheritance tax either. Texas has never imposed a tax on beneficiaries who receive inherited property. Some states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania) tax the recipient; Texas does not.
- Federal estate tax still applies. The 2025 federal exemption is $13.99 million per person ($27.98 million for married couples). This is set to sunset after 2025, potentially dropping to approximately $7 million per person in 2026 unless Congress acts.
The Tax Cuts and Jobs Act doubled the federal estate tax exemption through 2025. Without Congressional action, exemptions revert to roughly half (~$7M per person) starting January 1, 2026. Texas residents with estates above the reduced threshold should plan now.
Texas Community Property and the Step-Up Basis Advantage
Texas is one of nine community property states (along with Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Washington, and Wisconsin). This classification provides one of the most significant tax advantages available in estate planning: the full step-up in basis on both halves of community property at the first spouse's death.
IRC 1014(b)(6): The Full Step-Up Rule
Under Internal Revenue Code Section 1014(b)(6), when one spouse dies, the entire value of community property -- not just the decedent's half -- receives a new tax basis equal to fair market value at the date of death. This eliminates all unrealized capital gains on the asset.
Scenario: A married couple in Texas purchases stock for $100,000 (community property). At the first spouse's death, the stock is worth $1,000,000. Under IRC 1014(b)(6), the entire $1,000,000 receives a new basis. If the surviving spouse sells immediately, the capital gain is $0 -- saving approximately $214,200 in federal taxes (23.8% x $900,000).
Comparison: Community Property vs. Common Law States
| Factor | Community Property (TX) | Common Law States |
|---|---|---|
| Step-up at first death | 100% of property | Only decedent's 50% |
| Surviving spouse's basis | Full FMV at death | Original cost basis on their half |
| Tax on $900K gain (example) | $0 | ~$107,100 (on $450K unrealized gain) |
| Documentation needed | Proof of community character | Proof of ownership split |
Separate Property Rules
Not all property in Texas is community property. Under Texas Family Code Section 3.001-3.003, the following is classified as separate property:
- Property owned before marriage -- retains its separate character
- Gifts received during marriage -- remain the separate property of the receiving spouse
- Inheritances -- property inherited by one spouse during marriage is separate
- Personal injury recoveries -- compensation for personal injuries (except lost wages)
Separate property only receives a step-up on the decedent's interest, the same as in a common law state.
When separate property is mixed (commingled) with community property, it can lose its separate character. For example, depositing an inheritance into a joint bank account used for household expenses may make it impossible to trace the separate funds. I recommend maintaining separate accounts and detailed records for any property you want to preserve as separate.
Community Property Agreements
Texas Family Code Sections 4.102-4.106 allow spouses to enter into community property agreements (also called partition or exchange agreements) that can:
- Convert separate property into community property (to gain the full step-up benefit)
- Partition community property into separate property (for asset protection purposes)
- Agree that income from separate property will be community property
These agreements must be in writing and signed by both spouses. They can be a powerful tool for maximizing the IRC 1014(b)(6) step-up benefit by converting highly appreciated separate property into community property before the first spouse's death.
Texas Homestead Protection -- Among the Strongest in the Nation
Texas offers some of the most robust homestead protections in the United States, shielding a family's home from most creditors through both constitutional provisions and statutory law.
Homestead Exemption from Forced Sale
Under Texas Property Code Section 41.001, a homestead is exempt from seizure for payment of debts except for:
- Purchase money liens (the mortgage used to buy the home)
- Property taxes
- Owelty of partition liens (in divorce)
- Home equity loans (strictly regulated under TX Constitution Art. XVI, Section 50)
- Home improvement liens
- Refinance of a lien against a homestead
Urban homestead: Up to 10 acres, no cap on value. A $50 million home on 10 acres in Houston is fully exempt.
Rural homestead: Up to 100 acres for a single adult, 200 acres for a family, no cap on value.
Spousal Protection Requirements
Under Texas law, both spouses must sign any conveyance, mortgage, or lien on the homestead, regardless of who holds title. This protects the non-titled spouse from losing the family home without consent. A deed or lien signed by only one spouse is void.
Home Equity Loan Restrictions
Texas Constitution Article XVI, Section 50 imposes strict limits on home equity loans that do not exist in most other states:
- Maximum loan-to-value ratio of 80%
- Cannot be closed less than 12 days after application
- Borrower has 3 business days to rescind after closing
- No more than one home equity loan per year
- Lender fees capped at 2% of the loan amount (originally 3%, amended)
- No forfeiture provisions -- lender cannot pursue deficiency judgment on a home equity loan foreclosure
Property Tax Homestead Exemptions
Separate from the creditor protection, Texas provides valuable property tax exemptions for homestead property:
- $100,000 school district exemption (increased from $40,000 in 2023 by Proposition 4)
- Age 65+ or Disabled: Additional $10,000 exemption from school districts, plus a property tax ceiling (freeze) on school taxes
- Surviving spouse of 65+: Can retain the tax ceiling if they were 55+ when the qualifying spouse died
- Counties, cities, and special districts may offer additional optional exemptions (typically 20% of appraised value)
Homestead and Probate
The homestead receives special treatment in Texas probate. Under the Texas Estates Code:
- The surviving spouse has the right to occupy the homestead for life, even if the home was the decedent's separate property
- Minor children are also entitled to remain in the homestead
- The homestead is generally exempt from claims of estate creditors
- If the decedent dies without a will, the surviving spouse's homestead right takes priority over distribution to other heirs
Transfer-on-Death Deeds (TOD Deeds) in Texas
Since September 1, 2015, Texas has allowed real property owners to execute Transfer-on-Death Deeds under Texas Estates Code Chapter 114. A TOD deed transfers real property directly to a named beneficiary at the owner's death, completely bypassing probate.
Requirements for a Valid TOD Deed
- Signed by the transferor (property owner) or the transferor's agent under a durable power of attorney
- Acknowledged before a notary public (notarized)
- Recorded in the deed records of the county where the property is located before the transferor's death
- Must contain a notice that it revokes any prior TOD deed for the same property
- Must include the statutory warning language prescribed by TX Estates Code Section 114.151
A TOD deed is revocable at any time during the transferor's lifetime. The transferor can sell the property, create a new TOD deed naming a different beneficiary, or record a revocation instrument. The beneficiary has no rights to the property until the transferor's death.
TOD Deed vs. Other Transfer Methods
| Feature | TOD Deed | Revocable Trust | Probate Will |
|---|---|---|---|
| Avoids probate | Yes | Yes | No |
| Cost to set up | Low ($50-$200) | Moderate ($1,500+) | Low ($300+) |
| Revocable | Yes | Yes | Yes |
| Creditor protection | None | None (revocable) | None |
| Multi-asset coverage | Single property | All funded assets | All probate assets |
| Privacy | Deed is public record | Trust is private | Will is public after probate |
Muniment of Title (TX Estates Code Section 257)
Texas offers a simplified probate option called Muniment of Title -- available when a decedent dies with a valid will, there are no unpaid debts (other than debts secured by real property), and no full administration of the estate is necessary. Key features:
- No executor or administrator is appointed
- The court simply admits the will and orders it to serve as a "muniment of title" -- proof of the beneficiaries' ownership
- Much faster and cheaper than full probate (often completed in a single hearing)
- The order is recorded in the deed records to transfer real property
- Must be filed within 4 years of death (like all Texas will probate)
Small Estate Affidavit (TX Estates Code Section 205)
For very small estates, Texas provides the Small Estate Affidavit process:
- Available when the estate value (excluding homestead and exempt property) does not exceed $75,000
- Must wait at least 30 days after the decedent's death
- All distributees must sign the affidavit
- Must be approved by the court
- Once approved, it functions like a deed or transfer instrument for the assets listed
- Cannot be used if there is a will -- the will must be probated instead (muniment of title is the simplified alternative for will-based estates)
Independent Administration (TX Estates Code Section 401)
Texas strongly favors independent administration, which allows an executor to manage and distribute the estate with minimal court oversight. This is the default when a will names an independent executor. Benefits include:
- No requirement for court approval of routine actions (selling property, paying debts, making distributions)
- No bond requirement (if waived in the will)
- Significantly lower legal fees and faster administration
- Even intestate estates can have independent administration if all heirs agree
Trust Planning for Texas Residents
While Texas does not impose a state estate or income tax -- removing one major motivation for trust-based planning -- trusts remain important tools for probate avoidance, asset protection, and multi-generational wealth transfer.
The Texas Trust Code (TX Property Code Chapters 112-115)
Texas trusts are governed by the Texas Trust Code, codified in the Texas Property Code. Key provisions include:
- Creation: A trust can be created by written instrument, transfer of property, or court order. Oral trusts are only valid for personal property.
- Modification and termination: A settlor can modify or revoke a trust unless it is expressly made irrevocable. Courts can modify irrevocable trusts if their purposes have been fulfilled or become impractical.
- Trustee duties: Trustees must act in good faith, with the care of a prudent person, and in the interest of beneficiaries. Texas adopted a version of the Uniform Prudent Investor Act.
- Spendthrift provisions: Texas recognizes spendthrift trusts that protect beneficiary interests from creditors (TX Property Code Section 112.035).
Rule Against Perpetuities: 300-Year Limit
Texas extends the common-law rule against perpetuities to 300 years for interests created on or after September 1, 2021 (previously the traditional lives-in-being-plus-21-years). This is longer than most states but shorter than jurisdictions that have abolished the rule entirely:
| State | Trust Duration | Notes |
|---|---|---|
| Delaware | Unlimited (abolished) | Perpetual dynasty trusts |
| Nevada | 365 years | Also no state income tax |
| Texas | 300 years | Effective Sept. 1, 2021 |
| Florida | 360 years | Effective 2001 |
| California | 90 years | Most restrictive major state |
Community Property Trusts
Texas couples can place community property into a revocable living trust while preserving its community property character. This is critical for maintaining the IRC 1014(b)(6) full step-up benefit. The trust agreement should explicitly state that the property retains its community character.
Revocable Living Trust Benefits in Texas
Even though Texas has efficient probate procedures (muniment of title, independent administration), a revocable living trust can still provide advantages:
- Privacy: Trust terms and asset details remain private, unlike wills filed in probate court
- Multi-state property: Avoids ancillary probate in other states where you own real estate
- Incapacity planning: Successor trustee can manage assets without guardianship proceedings
- Avoiding the 4-year filing deadline: Texas requires will probate within 4 years of death; trusts have no such limitation
- Blended families: More detailed control over distributions than a will provides
Unlike Delaware, Nevada, Alaska, and South Dakota, Texas does not allow Domestic Asset Protection Trusts (DAPTs). In Texas, you cannot create an irrevocable trust for your own benefit that is shielded from your creditors. If you need self-settled asset protection, I can help structure a trust in a DAPT jurisdiction while you remain a Texas resident.
Multi-State Trust Planning Strategy
Texas residents can take advantage of other states' trust laws while enjoying Texas's no-income-tax environment:
- Delaware dynasty trust: Perpetual duration, strong asset protection, directed trust provisions
- Nevada DAPT: Self-settled asset protection with only a 2-year lookback period
- South Dakota trust: No rule against perpetuities, privacy protections, decanting statutes
- Texas advantage: As a Texas resident with no state income tax, the trust's situs in another state generally does not create Texas tax consequences
The key consideration in multi-state planning is using a corporate trustee or trust company in the target jurisdiction to establish proper situs for the trust, while the settlor and beneficiaries remain in Texas.
Related Tools & Resources
Frequently Asked Questions -- Texas Estate & Gift Tax
Schedule a Consultation
I'm Sergei Tokmakov, Esq. I advise clients on estate and gift tax planning, including multi-state trust strategies for Texas residents. My rate is $240/hr. Select a time below to discuss your situation.