Death and Taxes
Benjamin Franklin famously wrote, "In this world nothing can be said to be certain, except death and taxes." More than 200 years later, those words remain true. While death is an emotional event for every family, it also triggers numerous legal and tax consequences that many people are unprepared to face. Understanding what happens after death can help families avoid unnecessary stress, delays, and costly mistakes.
When a person dies in Texas, several legal and practical steps typically follow. What happens depends on whether the person had a valid will, how they owned their property, and the value of their estate.
What Happens After Death?
1. A death certificate is issued
A physician or medical examiner certifies the death, and the funeral home usually helps obtain certified copies of the death certificate. These are needed to handle most legal and financial matters.
2. The estate is administered
An estate is everything a person owns and owes at the time of their death. The process of handling the estate after death depends on whether the person left a will.
If there is a valid will: The named executor typically files the will with the probate court in the county where the person lived. If the court approves, the executor is appointed to administer the estate according to the will.
If there is no will (intestate): Texas law determines who inherits the property. The court appoints an administrator to handle the estate.
3. Understanding Probate
Probate is often one of the biggest concerns in estate planning because it can delay access to assets, increase legal costs, and require court involvement. Probate is the court-supervised legal process of settling a deceased person's estate. In Texas, probate is generally used to:
Prove that a will is valid (if there is one).
Appoint an executor or administrator.
Identify the deceased's assets.
Pay debts, taxes, and expenses.
Distribute the remaining property to the rightful beneficiaries or heirs.
Type of Probate | Typical Time |
Simple estate with a valid will | 2–6 months |
Average estate | 6–12 months |
Complex estate (multiple properties, business, tax issues) | 1–2 years |
Contested probate (family disputes, will challenges) | Several years |
In a simple case, your loved ones may be locked out of your house or assets that you intended to leave for them for 2 to 6 months if your estate needs to go to probate. In complicated cases, it may take years.
Probate is not always bad. Texas has one of the more streamlined probate systems in the United States, especially if the estate has a valid, well-drafted will and the executor can use independent administration, which minimizes court involvement.
Probate is generally required when a person dies owning assets in their name alone with no beneficiary designation or other transfer mechanism. Examples include:
A house titled solely in the deceased's name
A bank account with no payable-on-death (POD) beneficiary
A vehicle owned solely by the deceased
Stocks or brokerage accounts with no transfer-on-death (TOD) designation
Personal belongings without another legal owner
4. Which Assets Avoid Probate?
There are assets that pass directly to beneficiaries without court involvement, such as:
Life insurance with a named beneficiary
401(k), IRA, and other retirement accounts with designated beneficiaries
Bank accounts with Payable-on-death (POD) beneficiaries
Brokerage accounts with Transfer-on-death (TOD) beneficiaries
Real estate with a valid Transfer-on-Death Deed
Joint accounts with rights of survivorship (when properly established)
Property held in a living trust.
5. Paying Debts
For the debts owed by the deceased, the executor or administrator will identify the deceased's assets, notify creditors, and pay valid debts, taxes, and administration expenses from the estate.
In general, family members are not personally responsible for the debts unless they co-signed the debt, guaranteed the debt, or are otherwise legally liable.
6. How Property Is Distributed
After debts and expenses are paid, the remaining property is distributed according to the will, or if there is no will, according to Texas intestacy laws.
Texas intestacy rules (simplified)
Texas is a community property state - Community property is generally property acquired by either spouse during the marriage, except property that qualifies as separate property.
If married with no children
If married with children The outcome depends on whether all children are also the surviving spouse's children.
Separate property which belongs only to one spouse follows different inheritance rules.
If unmarried Generally:
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7. Small estates
If the estate is relatively small and meets Texas legal requirements, heirs may be able to use a Small Estate Affidavit instead of a full probate proceeding, which can save time and expense.
To qualify, among other requirements:
The person died without a will.
The value of the probate estate (excluding the homestead and certain exempt property) does not exceed $75,000.
The assets are sufficient to pay the estate's debts (other than debts secured by exempt property).
The heirs are known and can be identified.
8. Taxes
Texas has no state inheritance tax or estate tax. A federal estate tax applies only to very large estates that exceed the federal exemption amount in effect at the time of death. I will discuss Federal Estate Tax in the next part in detail.
The deceased's final federal income tax return may still need to be filed.
9. Immediate steps after a death
Obtain certified death certificate.
Locate the original will and any trust documents.
Secure the deceased's home, vehicle, and valuables.
Notify Social Security, financial institutions, insurance companies, and employers.
Consult a Texas probate attorney if the estate includes real estate, a business, significant assets, or there are family disputes.
Tax Consequences After Death
Although death marks the end of a person's tax filing obligations, it often creates important tax consequences for the beneficiaries who inherit the assets. One of the most significant is the step-up in basis.
Step-Up in Basis
One of the most valuable tax benefits after death is the step-up in basis. If an asset has increased in value during the owner's lifetime, the tax basis is usually adjusted to its fair market value on the date of death. For example, if a parent bought stock for $20,000 and it is worth $200,000 when they die, the heir's new basis is generally $200,000. If the heir later sells it for $205,000, they may owe capital gains tax on only $5,000 instead of $185,000. This rule can apply to stocks, mutual funds, real estate, and many other capital assets.
Retirement accounts such as traditional IRAs and 401(k)s generally do not receive a step-up in basis because they are subject to different tax rules.
This table below summarizes type of assets and their tax treatments.
Asset | Probate? | Step-Up in Basis? | Income Tax to Heir? |
Cash | Maybe | N/A | No (interest after death is taxable) |
Personal residence | Maybe | ✅ Yes | No until sold |
Rental property | Maybe | ✅ Yes | No until sold |
Stocks | Maybe | ✅ Yes | No until sold |
Mutual funds | Maybe | ✅ Yes | No until sold |
Cryptocurrency | Maybe | Generally yes | No until sold |
Vehicles | Maybe | Generally yes | Usually none |
Collectibles | Maybe | Generally yes | No until sold |
Life insurance | No | N/A | Generally income tax-free |
Traditional IRA | No | ❌ No | Withdrawals generally taxable |
Roth IRA | No | ❌ No basis step-up needed | Qualified withdrawals generally tax-free |
401(k) | No | ❌ No | Withdrawals generally taxable |
Accounts receivable | Maybe | ❌ No | Taxable when collected |
Final paycheck | No | ❌ No | Taxable when received |
Federal Estate Tax at a glance
The federal estate tax is a tax imposed on the transfer of a person's wealth at death. Unlike an income tax, it is based on the value of the deceased person's estate rather than on annual earnings.
Who pays the tax? The estate pays the federal estate tax before assets are distributed to beneficiaries. Beneficiaries generally do not pay the estate tax directly.
Federal exemption (2026): Each individual may transfer up to $15 million free of federal estate tax. A married couple may generally transfer up to $30 million with proper estate planning and a timely portability election.
Only the portion of the estate that exceeds the available exemption is generally subject to federal estate tax—not the entire estate.
Tax rate: The federal estate tax rate is up to 40% on the taxable value of an estate that exceeds the available exemption.
Texas estate tax: Texas does not impose a state estate tax.
Texas inheritance tax: Texas does not impose an inheritance tax.
Who is affected? Because the federal exemption is very high, the vast majority of Americans will never owe federal estate tax.
Estate Tax vs. Inheritance Tax
These two taxes are often confused, but they are different.
Estate Tax: Paid by the estate before assets are distributed to beneficiaries.
Inheritance Tax: Paid by the beneficiary after receiving inherited property. There is no federal inheritance tax, and Texas does not impose one.
Estate Tax vs. Income Tax
Receiving an inheritance is generally not taxable income.
For example, if you inherit:
A house
Stocks
Cash
You generally do not pay income tax simply because you inherited those assets.
However, certain inherited assets—such as traditional IRAs, 401(k) accounts, and other "Income in Respect of a Decedent (IRD)" assets—may be subject to ordinary income tax when distributions are received.
Example of Respect of Income in Respect of a Decedent (IRD):
Deferred compensation
Unpaid bonuses
Installment sale receivables
Accrued interest
Required minimum distributions
Example
Suppose Sarah dies in 2026 with an estate valued at $12 million.
Estate value: $12,000,000
Federal estate tax exemption: $15,000,000
Since the estate is below the exemption amount, no federal estate tax is due.
If Sarah's estate were worth $18 million, only the amount exceeding the available exemption would generally be subject to federal estate tax.
Bottom Line
For most families, estate planning is not about avoiding federal estate tax. Because the federal estate tax exemption is so high, very few estates will ever owe this tax. Instead, effective estate planning focuses on making the transfer of wealth as simple, efficient, and cost-effective as possible. Key objectives include:
Avoiding probate whenever practical to reduce delays, court involvement, and expenses.
Ensuring assets pass to the intended beneficiaries by keeping beneficiary designations on retirement accounts, life insurance policies, and other payable-on-death assets up to date.
Reducing future income taxes by taking advantage of tax-saving strategies, such as the step-up in basis for appreciated assets.
Planning for incapacity by preparing essential documents, including a Durable Financial Power of Attorney, a Medical Power of Attorney, and other advance directives.
Protecting loved ones and preserving family wealth through thoughtful estate planning.
Death is inevitable, but confusion, unnecessary delays, family disputes, and avoidable taxes often are not. A well-designed estate plan can help your loved ones settle your affairs more efficiently, minimize future tax burdens, and ensure that your assets are distributed according to your wishes.
The best estate plan is not created after a crisis—it is created long before it is ever needed.
By: Vien Vo, CPA
August 5, 2026
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