Tax-Smart Estate Planning

The basic exclusion amount is $15,000,000 per person for calendar year 2026. Section 70106 of the One Big Beautiful Bill Act amended 26 U.S.C. § 2010(c)(3) to set that figure, which replaced the reduction that prior law had scheduled for 2026, and the amount will not be adjusted for inflation until calendar year 2027. What a person can actually shelter is the applicable exclusion amount defined in § 2010(c)(2): the basic exclusion amount plus, for a surviving spouse, any deceased spousal unused exclusion carried over from a spouse who died earlier. Texas imposes no separate state estate or inheritance tax, so for a Texas family the federal number is the only threshold in play. Being under it does not make tax planning irrelevant — it moves the work from estate tax to basis, trust income tax, and property characterization, which is where most Texas families actually lose money.

Only if nobody files for it — and this is the most expensive routine mistake in estate planning. A surviving spouse can add the deceased spouse's unused exclusion to their own under 26 U.S.C. § 2010(c)(4), but § 2010(c)(5)(A) is explicit that the amount may not be taken into account unless the executor of the first spouse's estate files an estate tax return computing it and makes the election on that return. Families skip the return constantly, because the first spouse's estate was far below the filing threshold and a Form 706 felt like paperwork for nothing. It is not nothing: it is a $15,000,000 shelter that evaporates if unclaimed. There is a rescue. Rev. Proc. 2022-32, which superseded Rev. Proc. 2017-34, gives a simplified method to make a late portability election on or before the fifth anniversary of the decedent's date of death, available where the estate was not otherwise required to file a return under § 6018(a). If your spouse died within the last five years and no 706 was filed, call us before that window closes.

Under 26 U.S.C. § 1014(a)(1), property acquired from a decedent takes a basis equal to its fair market value at the date of death. Decades of unrealized capital gain simply disappear. The contrast is 26 U.S.C. § 1015(a): property acquired by gift keeps the donor's basis in the recipient's hands. Those two sections are the reason the same asset can produce a large tax bill or none at all depending on whether it moves during life or at death. A parent who transfers long-held stock or a rental house to a child during life hands over the original basis along with the deed; the same asset held until death would have passed with the gain wiped out. Deciding which assets to give away now and which to hold is one of the highest-value choices a family makes, and it is routinely made backwards on advice that only considered the gift-tax side.

Because of one subsection written for community-property states. Ordinarily only a decedent's own half of jointly held property gets the § 1014 step-up. But 26 U.S.C. § 1014(b)(6) treats the surviving spouse's one-half share of community property as property acquired from the decedent — so at the first spouse's death, both halves are revalued to fair market value. The statute conditions this on at least one-half of the whole community interest being includible in the decedent's gross estate. In a common-law state, the surviving spouse keeps their original basis on their half and pays capital-gains tax on that appreciation later; in Texas, that gain is gone. On a long-held McKinney rental or a concentrated stock position, the difference between a full double step-up and a half step-up is frequently six figures of future capital-gains tax.

Characterization decides it, and characterization is not the same thing as whose name is on the account. Tex. Fam. Code § 3.002 defines community property as everything other than separate property acquired by either spouse during marriage, and § 3.003 presumes that property possessed by either spouse during or on dissolution of the marriage is community — a presumption rebuttable only by clear and convincing evidence. That presumption is a Texas family's friend for basis purposes, but it is defeated by property that genuinely is separate: assets owned before the marriage, or received during it by gift, devise, or descent. Those keep their separate character no matter which account they sit in, and at the first death only the decedent's own separate property gets a step-up. A brokerage account funded with an inheritance and a brokerage account funded with salary look identical on a statement and are taxed very differently at death. Sorting that out while both spouses are alive and can testify to it is far cheaper than reconstructing it afterward.

Yes, Texas expressly allows it, and it is one of the few genuinely powerful tax moves available to an ordinary Texas couple — but it is not free, and we will not paper one without walking you through what you are giving up. Tex. Fam. Code § 4.202 lets spouses agree that all or part of either spouse's separate property becomes community property. Section 4.203 sets the formalities: the agreement must be in writing, signed by both spouses, identify the property, and specify that it is being converted — and it says outright that merely transferring property or changing the name on title does not accomplish a conversion. Section 4.205 makes the agreement unenforceable against a spouse who did not sign it voluntarily or who did not receive a fair and reasonable disclosure of its legal effect, and § 4.205(b) supplies statutory disclosure language warning about three specific consequences: the property may become subject to the other spouse's creditors, the converting spouse may lose sole management authority over it, and the property may be lost entirely if the marriage ends. Section 4.206 preserves the rights of creditors who were already there. So the honest trade is a capital-gains benefit at death against creditor exposure, loss of unilateral control, and divorce risk during life. For a stable long marriage holding a highly appreciated separate asset, it is often clearly worth it. For a second marriage with children from the first, it often is not. That judgment is the engagement.

Yes, and the compression is more severe than almost anyone expects. Under the 2026 rate table for estates and trusts published in Rev. Proc. 2025-32 (implementing 26 U.S.C. § 1(j)(2)(E)), a trust pays 10% on the first $3,300 of taxable income, reaches 35% above $11,700, and hits the top 37% bracket on everything above $16,000. An individual does not reach 37% until several hundred thousand dollars of income. On the capital-gains side the same revenue procedure sets the estate-and-trust maximum zero-rate amount at $3,300 and the maximum 15% rate amount at $16,250, so a trust pays 20% on long-term gains above $16,250. Worse, 26 U.S.C. § 1411(a)(2)(B)(ii) pegs a trust's 3.8% net investment income tax threshold to the dollar amount where the top bracket begins — the same $16,000 — so a non-grantor trust holding investments can face a 40.8% marginal federal rate on income that would be taxed far more gently in a beneficiary's own return. These figures re-index annually; the structural point does not.

Three levers, and the first one is available even after the year has ended. A non-grantor trust gets a deduction for income it distributes, and the beneficiary reports it instead — so income taxed at 37% inside the trust above $16,000 may be taxed in a much lower bracket in the hands of a beneficiary who has little other income. The timing lever is 26 U.S.C. § 663(b): an amount properly paid or credited within the first 65 days of a taxable year is treated as paid on the last day of the preceding taxable year, but only if the fiduciary makes the election, which § 663(b)(2) requires. In practice that means a trustee who sees a bad tax result on a draft return still has roughly two months into the new year to fix it. The second lever is grantor-trust status, which moves the income to the grantor's return entirely. The third is asset location — deciding what the trust holds in the first place, so it is not generating ordinary income it does not need. We design trusts with all three in mind on day one rather than discovering the problem on the first Form 1041.

A grantor trust is one where the grantor is treated as the tax owner for income-tax purposes while the trust remains a separate entity for estate-tax purposes. 26 U.S.C. § 671 supplies the mechanism: where the grantor is treated as the owner of a portion of a trust, that portion's income, deductions, and credits are included in computing the grantor's own taxable income. The asymmetry is the whole point. The grantor pays the trust's income tax from outside the trust, which lets the trust compound untouched — economically an additional transfer to the beneficiaries that is not itself a taxable gift. The status is usually created deliberately with a specific retained power; the most common is the one in 26 U.S.C. § 675(4)(C), a power to reacquire the trust corpus by substituting other property of equivalent value. Intentionally defective grantor trusts, spousal lifetime access trusts, and grantor retained annuity trusts all run on this toggle in different ways. We use each where it fits, and we are careful about the reciprocal-trust doctrine when spouses create trusts for each other.

A QTIP trust lets you leave assets in trust for your surviving spouse — controlling who ultimately inherits — while still qualifying the transfer for the marital deduction. Under 26 U.S.C. § 2056(b)(7)(A), qualified terminable interest property is treated as passing to the surviving spouse, and § 2056(b)(7)(B)(i) requires that the spouse have a qualifying income interest for life. The election is made by the executor on the estate tax return and, under § 2056(b)(7)(B)(v), is irrevocable once made. The flexibility that most families never hear about is in § 2056(b)(7)(B)(iv), which provides that a specific portion of the property is treated as separate property — and § 2056(b)(10) limits a specific portion to one determined on a fractional or percentage basis. That is what makes a partial QTIP election possible: an executor can elect on part of the trust, using just enough of the first spouse's exclusion to avoid wasting it while deferring tax on the rest. It is a decision made after death, with real numbers in hand, by an executor who has to know the option exists. Older documents that force an all-or-nothing result give that flexibility away.

Almost certainly, because estate tax is the one tax most families will never owe and the one they spend all their attention on. Below $15,000,000 the live issues are basis planning under 26 U.S.C. §§ 1014 and 1015, the double step-up available to Texas community property under § 1014(b)(6), compressed trust income-tax brackets that reach 37% above $16,000, the 3.8% net investment income tax on undistributed trust income under § 1411(a)(2), and the portability election under § 2010(c)(5)(A) that has to be made on a return nobody thought they needed to file. Not one of those depends on having a taxable estate. Most of the highest-value tax planning we do happens well below the exemption.

Yes, and we encourage it. Tax-smart estate planning works best when the attorney, CPA, and financial advisor are in the same conversation. We routinely review current asset titling, community-property characterization, beneficiary designations, and account locations alongside your existing advisors so the estate plan, the investment plan, and the tax return are consistent with each other. A CPA reports the facts you hand them accurately; the structuring has to happen before those facts exist.

Carla holds a Master of Laws in Taxation from New York University School of Law — widely regarded as the most respected tax LLM program in the country. She practiced as an in-house tax attorney at Alcon Laboratories from 1985 to 1989 and at Eckert Seamans from 1989 to 1993 before opening her own estate planning practice in 1993, and she has been licensed in Texas since 1986. Few Texas estate planners have a real tax background. That is the difference between an estate plan that handles ownership and one that handles the tax bill.