Income Tax

The United States assesses federal tax on the worldwide income of its citizens and residents, as well as on the US-sourced income of non-resident aliens, subject to income tax treaties that exist with many countries. Accordingly, individuals, estates and trusts in Texas are subject to US federal income tax.  Federal tax on ordinary income is assessed on a graduated scale, with marginal rates ranging from 10% to a top rate of 37%. Federal tax on income from long-term capital gains and qualified dividends is generally assessed at a rate of 20%. Individuals may be subject to an additional 3.8% tax on the lesser of their net investment income or the amount by which their modified adjusted gross income exceeds certain thresholds. While private foundations (hereafter referred to as “foundations”) are generally exempt from federal income tax, a variety of taxes, including significant excise taxes, can apply to foundations in specific circumstances.

No state or local income taxes are assessed in Texas; therefore, individuals, estates, trusts and foundations in Texas are only subject to US federal income tax.

Transfer Tax

The United States assesses federal tax on transfers by its citizens and non-citizen domiciliaries, as well as on transfers of US situs property by non-citizen non-domiciliaries, including gift tax, estate tax, and generation-skipping transfer tax. (Being a lawful permanent resident of the United States, that is, holding a “green card”, arguably is evidence that a person is a non-citizen domiciliary.) Accordingly, such persons living in Texas are subject to US transfer taxes. Gift tax is assessed on gratuitous transfers (ie, on gifts or transfers without consideration). Estate tax is assessed upon assets owned by a decedent at their death.  Generation-skipping transfer tax is generally assessed upon gratuitous transfers, either during lifetime or at death, to descendants more than one generation removed from the transferor and persons more than 37.5 years younger than the transferor. Each of these taxes is assessed at a rate of 40%, though the assessment of estate tax is subject to a relatively abbreviated set of tax brackets. See the discussion regarding applicable US federal exemptions and exclusions in 1.2 Exemptions.

No state or local transfer taxes are assessed in Texas; therefore, individuals, estates, trusts and foundations in Texas are only subject to US transfer taxes.

Property Tax

Generally, no federal tax is assessed on the ownership of real property.

While Texas has no state property taxes, local governments in Texas (ie, counties and cities) do assess and collect property taxes. These are ad valorem taxes, meaning they are assessed based on the value of the property. These taxes can be assessed on both real property and business personal property.  The local government sets the tax rate and assesses the value of the property as of 1 January of the tax year, which value is then used to compute the tax due. There are a number of important property tax exemptions or special rules, including without limitation:

• the residential homestead exemption for a property owner who occupies the property as their principal residence (which provides a partial exemption that removes part of the homestead’s value from taxation); and
• the agricultural appraisal for agricultural land (which can significantly lower a property’s assessed value). 

Generally the effective property tax rate is between 1% and 2%, depending on the tax jurisdiction. Individuals, estates and trusts in Texas are subject to these property taxes. Foundations may qualify for an exemption from property taxes.

Sales and Use Tax

Generally no federal tax is assessed on sales or use of goods.

Texas usually assesses sales and use tax at a rate of 8.25% on sales, leases and rentals of goods, as well as the purchase of certain services. No sales tax is imposed on the sale of real estate in Texas.

Franchise Tax

For the privilege of doing business in the state, Texas assesses a franchise tax on each taxable entity formed or organised in Texas, or doing business in Texas. Texas has an expansive interpretation with respect to “doing business in Texas”, including any contact with Texas that creates a sufficient nexus to allow state taxation pursuant to the US Constitution. The tax base is the entity’s margin, and margin can be calculated as:

• 70% of total revenue;
• total revenue minus cost of goods sold;
• total revenue minus compensation; or
• total revenue minus USD1 million. 

In 2025, no tax is due on total revenue less than USD2.47 million. The tax rate is 0.75%, though this is reduced to 0.375% for retail and wholesale, and there is an “EZ Computation” if total revenue is over USD20 million that applies a rate of 0.331%.

The US federal combined lifetime gift and estate tax exemption for 2025 is USD13.99 million. Under current law, this will increase to USD15 million in 2026 and thereafter, it will be subject to a mechanism for annual inflation adjustments. The lifetime exemption is available to both US citizens and non-citizen domiciliaries. A non-citizen non-domiciliary has no lifetime gift tax exemption and has an estate tax exemption of only USD60,000 with respect to their US situs property. However, all persons, whether they are citizens, non-citizen domiciliaries, or non-citizen non-domiciliaries, have a lifetime generation-skipping transfer tax exemption of USD13.99 million in 2025 (which, similarly, will increase to USD15 million in 2026, thereafter subject to annual inflation adjustments). All persons have an annual exclusion from gift tax (and, except with respect to transfers in trust, generation-skipping transfer tax) of USD19,000 per recipient in 2025, as well as unlimited exclusions with respect to gifts to a citizen spouse or to charity; provided the exclusion with respect to gifts to a non-citizen spouse is limited to USD190,000 in 2025. Any transfer in excess of the relevant exemption or exclusion amount is subject to the applicable transfer tax. See the discussion regarding applicable US federal transfer taxes in 1.1 Tax Regimes.

Since no state or local transfer taxes are assessed in Texas, there are no similar exemptions or exclusions at the state or local level.

Numerous strategies exist for planning with respect to US federal income tax. With respect to individuals, highly appreciated assets can be held until death, at which point, their basis receives a step-up to fair market value, thereby reducing or potentially avoiding gain recognition on disposition and any associated tax on capital gains. In Texas, because it is a community property state, this tax benefit extends to a surviving spouse’s interest in the community estate, meaning that the surviving spouse’s one-half interest in community property receives a similar step-up in basis on the death of the first spouse.

Other income tax planning strategies include tax loss harvesting, private placement life insurance, qualified opportunity zones, Section 1031 exchanges, retirement account contributions, Roth conversions, investments in municipal bonds, and tax residency planning (eg, moving to Texas), to name a few.

No state or local income taxes are assessed in Texas; therefore, Texas is a very tax-favoured state with respect to income tax planning. Many persons have moved for income tax reasons to Texas from other states in recent years, particularly from New York, Illinois and California, each of which assesses substantial state and/or local income taxes.

Pursuant to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), any disposition of a US real property interest by a foreign person is subject to US federal income tax withholding of 15%. In addition, rentals from US real property are US source income and when earned by a non-resident alien are subject to US federal income tax withholding of 30%; provided, if rentals are considered “effectively connected income”, they are reported on a US income tax return and are not subject to withholding.

No state or local taxes are assessed specifically against non-residents and non-citizens in Texas.

US federal income tax law and policy can vary substantially over relatively short periods due to changes in the political landscape of the United States. With the re-election of President Trump, such a change is currently occurring and new legislation and administrative initiatives will bring substantial changes to tax law and policy in the United States over the near term.

State and local tax on individual income is prohibited by the Texas Constitution, and Texas has no capital gains, gift, estate, or generation-skipping transfer taxes. Further, legislation proposing constitutional amendments that prohibit capital gains tax and that prohibit gift, estate and generation-skipping transfer taxes passed both chambers of the Texas legislature in 2025 and will be voted on in an election for constitutional amendments later this year. In light of this, tax laws in Texas appear relatively stable.

Following recent US federal court decisions and the election of the new administration in the United States, the effect of the Corporate Transparency Act has been dramatically curtailed. US companies and US persons are now exempt from filing beneficial ownership information (BOI) reports; however, foreign companies must still generally file BOI reports with the Financial Crimes Enforcement Network (“FinCEN”).

In Texas, certain information becomes publicly available in connection with the formation of an entity, including the identity of the governing person(s) of the entity.

In addition, each taxable entity formed as a corporation, limited liability company (LLC), limited partnership, professional association, and financial institution that is organised in Texas or has a nexus in Texas must file a Texas Franchise Tax Public Information Report (PIR) annually. Certain information from the PIR may be disclosed on the Texas Comptroller and the Texas Secretary of State websites.

The United States is in the midst of the largest intergenerational wealth transfer in the country’s history. With the retirement and eventual death of the “baby boomer” generation, more wealth is transferring from parents to children and from parents to grandchildren, outright or in trust, than has ever been transferred in the country’s history. This is creating unprecedented opportunities for wealth and estate planning for individuals and families.

In Texas, this same trend is occurring, and it is occurring against the backdrop of a successful state economy, cultural diversity, and a growing population. For many years, Texas has benefited from a strong energy sector. In addition, the medical services and financial services industries have shown significant strength in Texas. These industries have brought numerous persons to Texas from across the country and from across the world, adding to the diversity in the major metropolitan areas and across the state. Many of these new arrivals have remained in Texas, helping to fuel population growth.

Individuals have become increasingly mobile in recent decades, and this trend has been even more pronounced with respect to wealthy individuals and families.  As a result, there has been a dramatic increase in the frequency with which multinational individuals and families have sought advice and estate plans. This requires particular attention to the interplay of laws and regulations between various jurisdictions in which persons and assets are located and, when appropriate, the inclusion of counsel with jurisdiction-specific knowledge.

Texas has been at the forefront of this trend due to the international reach of the energy sector, as well as the international reach of the medical services and financial services industries. These bring clients to Texas from all over the world. Texas has also been, and continues to be, a gateway to Central America and South America, with many Latin American clients coming to Texas and developing deep ties to the state and the United States as a whole, while maintaining meaningful ties to their countries of origin.

Forced heirship laws generally do not exist in the United States. Individuals generally have testamentary freedom to dispose of their assets as they wish.  Similarly, Texas has no forced heirship laws. See 2.4 Marital Property.

Community Property

Texas is a community property jurisdiction, meaning that a community estate arises during marriage, in which each spouse generally has an equal interest.  The Texas community property regime was established by the Texas Constitution, which provides “[a]ll property, both real and personal, of a spouse owned or claimed before marriage, and that acquired afterward by gift, devise or descent, shall be the separate property of that spouse...” The Texas Family Code also characterises recoveries from personal injury as a spouse’s separate property. The Texas Family Code defines community property by exclusion, providing that “[c]ommunity property consists of the property, other than separate property, acquired by either spouse during marriage”. 

Importantly, income earned during marriage, including income arising from a spouse’s separate property, is characterised as community property. Interest, dividends and rentals are also typically considered income and therefore community property. Capital gains are typically considered return on principal and therefore separate property. However, distributions from partnerships, other than liquidating distributions, are considered to be income and therefore community property.

Separate Property

The separate or community character of property is generally maintained as property changes form, for example, when property is sold, the resulting proceeds maintain the same character as the former property. In order to determine the character of property, it may be necessary to trace the property back through subsequent mutations to its origin. Separate property that is commingled with community property is presumed to be community property unless the source of the separate property can be traced. If the source is traceable to separate property, the separate property portion of the commingled funds is separate property and the remainder is community property. Such tracing is often necessary where a separate property account earns income that is then reinvested in the account. The original funds are separate, but, because income from separate property is community property, funds in the account will become commingled and presumed to consist entirely of community property, unless the original separate property portion can be traced.

Community and Separate Property

In death and divorce

At death, Texas law presumes all property owned by a spouse to be community property. A party may overcome this presumption by providing clear and convincing evidence that the property was the decedent’s separate property.

In the event of a divorce, community property is divided evenly between the spouses; provided the division is subject to an equitable adjustment by the court depending on the circumstances. Separate property belongs to the respective spouse and is not subject to division in a divorce.

Control over property

The separate or community character of property also impacts the amount of control each spouse has over such property and whether such property is available to each spouse’s creditors. There are three characterisations of property for these purposes:

• sole management community property;
• joint management community property; and
• separate property. 

Sole management community property

A spouse’s sole management community property is community property that they would own if they were single. This class of property includes personal earnings and income from separate property. Assets titled solely in one spouse’s name are presumed to be their sole management community property. Each spouse has sole control over the management and disposition of their sole management community property. A spouse’s sole management community property is liable for their debts and any tort liability of the other spouse arising during the marriage, but generally it is exempt from the other spouse’s contractual debts.

Joint management community property

Joint management community property of the spouses consists of all the community property that is not sole management community property of either spouse. Such property is subject to both spouses’ joint control over management and disposition. Additionally, joint management community property is liable for the debts of either spouse. It is also subject to the tort liability of either spouse.

Separate property of a spouse

Separate property of a spouse is subject to only that spouse’s control over management and disposition. As a general rule, a spouse’s separate property is not subject to the debts of the other spouse. 

The spouses’ homestead and certain other types of property (such as retirement accounts and certain insurance products) are generally exempt from the debts of both spouses, regardless of their character.

Status of property in an irrevocable trust

Generally, if an irrevocable trust has been settled by a third party (either before or after marriage) for the benefit of a married individual, trust property should belong to the trustee and therefore, should be neither community nor separate in character while held within the trust. However, once property is distributed to the beneficiary spouse, the property should be characterised as separate property of the beneficiary spouse. Subsequently, the typical rules governing separate and community property should apply. However, this understanding of trust-owned property has not been decided by the Texas Supreme Court, and the lower courts have sometimes characterised trust-owned property and distributions of trust-owned property, particularly distributions of income, differently. Some case law in Texas suggests that, depending on the specific facts, trust property may be characterised as the separate property of the beneficiary spouse, and trust distributions, particularly distributions of trust income, may be characterised as community property. Texas courts have weighted several factors when determining whether distributions from a trust should be considered community property, including whether the beneficiary:

• is the trustee;
• relies on trust distributions for support;
• has a remainder interest in the trust;
• has received or can compel distributions of trust principal;
• has a general power of appointment; and
• can assign trust property.

Marital property agreements

The Texas Constitution provides for marital property agreements, including premarital agreements. It provides that “persons about to marry and spouses, without the intention to defraud pre-existing creditors, may by written instrument from time to time partition between themselves all or part of their property, then existing or to be acquired, or exchange between themselves the community interest of one spouse or future spouse in any property for the community interest of the other spouse or future spouse in other community property then existing or to be acquired, whereupon the portion or interest set aside to each spouse shall be and constitute a part of the separate property and estate of such spouse or future spouse; spouses also may from time to time, by written instrument, agree between themselves that the income or property from all or part of the separate property then owned or which thereafter might be acquired by only one of them, shall be the separate property of that spouse...” Accordingly, in Texas, marital property agreements are permitted to alter the character of any interest, present or future, legal or equitable, vested or contingent, in real or personal property, including income and earnings, of the spouses from the default characterisation under Texas law. 

In order to be valid, a marital property agreement must be in writing and signed by the parties. A marital property agreement may be amended only by a written agreement signed by the parties.

A marital property agreement is presumed enforceable under Texas law; provided, a spouse seeking to avoid it may overcome the presumption by demonstrating that either (i) the agreement was entered into involuntarily; or (ii) the agreement is unconscionable and certain disclosure standards were not met. To succeed with a claim of involuntariness, the spouse opposing the marital property agreement must demonstrate that they did not enter into the agreement intentionally or by the free exercise of their will. To avoid a marital property agreement due to unconscionability, the agreement must be “so one-sided that no reasonable person could consider it to be an arm’s length transaction” and the spouse opposing the marital property agreement must prove that at the time of the agreement, they (i) were not provided fair and reasonable disclosure of the financial condition of the other spouse; (ii) did not waive such disclosure; and (iii) did not have, or reasonably could not have had, adequate knowledge of the other spouse’s financial condition.

For US federal income tax purposes, property transferred by a decedent upon their death receives a step-up in basis to the fair market value of such property at the time of death. In Texas, because it is a community property state, this tax benefit extends to a surviving spouse’s interest in the community estate, meaning that the surviving spouse’s one half interest in community property receives a similar step-up in basis on the death of their spouse. See 1.3 Income Tax Planning.

There are numerous planning techniques for the purpose of transferring assets to lower generations in a tax-efficient manner, including without limitation:

• Dynasty trust – a trust that is designed to last for very long periods, often only limited by the applicable rule against perpetuities (RAP), thereby benefiting multiple successive generations and potentially reducing transfer taxes.
• Rule against perpetuities – sometimes clients create trusts in a jurisdiction that provides a longer RAP period, eg, Texas law now provides for a 300-year RAP period.
• Generation-skipping trust – a trust that is similar to a dynasty trust, except that it intentionally skips over children in order to directly benefit grandchildren and more remote descendants.
• Crummey trust – named after the trusts involved in Crummey v Commissioner, this trust provides beneficiaries with limited withdrawal rights that allow the use of annual exclusion amounts when making gifts in trust.
• Section 2503(c) trust – named after IRC Section 2503(c) which specifically authorises this type of trust, this allows the use of annual exclusion amounts when making gifts in trust for beneficiaries under the age of 21 without the need for withdrawal rights and the associated notices to beneficiaries.
• Family limited partnership (FLP) – an FLP or a family LLC is used to consolidate and hold assets, often in conjunction with other estate planning techniques, and can offer the potential for meaningful valuation discounts with respect to non-controlling interests.
• Intentionally defective grantor trust (IDGT) – a trust with respect to which a grantor intentionally retains one or more powers in order for the trust to be treated as a grantor trust for income tax purposes without undermining its effectiveness for transfer tax purposes.
• Sale for promissory notes – a sale of property in return for promissory notes, often utilising the applicable federal rate (AFR) in order to have the lowest interest rate possible without causing a gift.
• Spousal lifetime access trust (SLAT) – a trust created by a grantor for the benefit of their spouse and descendants, for the purpose of making gifts for the benefit of descendants and utilising available US federal gift and estate tax exemption, while maintaining their spouse’s access to assets.
• Insurance trust – a trust created to hold insurance policies, typically on the grantor’s life, which often includes special tax and insurance power provisions.
• Grantor retained annuity trust (GRAT) – a type of split-interests trust with respect to which the grantor retains a right to receive an annuity for a period of years, while the remainder interest is left to other beneficiaries, thereby reducing the value of any gift made by the grantor to the trust.
• Grantor retained unitrust (GRUT) – a type of split-interest trust with respect to which the grantor retains a right to receive payments based on a fixed percentage of trust value for a period of years, while the remainder interest is left to other beneficiaries, thereby reducing the value of any gift made by the grantor to the trust.
• Qualified personal residence trust (QPRT) – a type of statutorily authorised split-interest trust with respect to which the grantor donates their residence and retains the right to use the residence for a period of years, while the remainder interest is left to other beneficiaries, thereby reducing the value of any gift made by the grantor to the trust.
• Charitable lead trust (CLT) – a type of split-interest trust in which a charity is given a right to receive an annuity or payment based on a fixed percentage of trust value for a period of years, while the remainder interest is left to non-charitable beneficiaries, thereby reducing the value of any gift made by the grantor to the trust.
• Charitable remainder trust (CRT) – a type of split-interest trust in which one or more non-charitable beneficiaries are given a right to receive an annuity or payment based on a fixed percentage of trust value for a period of years, while the remainder interest is left to charity, thereby reducing the value of any gift made by the grantor to the trust.

More than one of these techniques can be combined within a single estate planning strategy, potentially amplifying the overall efficacy of the strategy. Which techniques and what strategy are most appropriate is client specific and dependent on individual facts and circumstances.

Texas has adopted the Texas Revised Uniform Fiduciary Access to Digital Assets Act (TRUFADAA) – see Texas Estates Code Chapter 2001. The TRUFADAA provides a fiduciary with the right to access the decedent’s digital assets, subject to the service provider’s terms-of-service agreement; provided, any direction in a decedent’s will, trust, power of attorney, or other record prevails over contrary provisions in such terms-of-service agreement; and provided, further, that any direction left by a decedent in a service provider’s online tool specifically with respect to such directions, prevails over all of the above.

Revocable Trusts

Revocable trusts are commonly used to consolidate and hold assets during life. This provides continuity of management, particularly upon the incapacity or death of the grantor. Upon the death of the grantor, revocable trusts help avoid the need for ancillary probate with respect to real property located outside the jurisdiction of original probate. Finally, revocable trusts help keep the decedent’s estate plan confidential, because only the decedent’s will, not the trust instrument governing the revocable trust, is filed as part of the probate proceeding.

Irrevocable Trusts

Irrevocable trusts are commonly used with a variety of estate planning techniques as discussed in 2.6 Transfer of Assets: Vehicle and Planning Mechanisms.

Grantor Trusts

Grantor trusts are often created so that the trusts are ignored for income tax purposes and the grantor remains responsible for reporting the trust’s tax attributes on their individual tax return.

Non-Grantor Trusts

Non-grantor trusts are also commonly created, so that transactions between the grantor and the trust are recognised for income tax purposes and the trust must report its tax attributes on its separate tax return; provided that certain tax attributes, such as taxable income and any associated tax liability, may be carried out to a beneficiary with distributions from the trust.

Charitable Funds and Foundations

Foundations are often created to facilitate clients’ charitable endeavours. However, in recent years, clients have increasingly opened accounts with donor advised funds, rather than create new foundations. Donor advised funds are treated as public charities for the purposes of determining deductibility rules applicable to clients’ donations, and clients’ accounts with donor advised funds are not subject to the annual 5% distribution requirement that applies to foundations. Finally, opening an account with a donor advised fund, rather than creating a foundation, also avoids the administrative work associated with maintaining a foundation.

From time to time clients also create other charitable organisations for their planning purposes, including, without limitation, private operating foundations and public charities.

Private Trust Companies (PTCs)

In the recent years, private trust companies (PTCs) have become a more common component of the estate plans of very wealthy individuals and families. PTCs allow clients with multiple trusts to consolidate management and control of those trusts in a privately owned and controlled entity. PTCs can also allow clients to consolidate governance, administrative, and family office activities for themselves and their families. Texas was at the forefront of this trend and allows the creation of PTCs. Texas PTCs are regulated by the Texas Department of Banking.

All trusts discussed herein are recognised in Texas.

If a foreign trust has a US citizen or resident as beneficiary or serving as fiduciary, various US federal reporting requirements may be triggered, including, without limitation, the following:

• Form 3520 reporting transactions with a foreign trust or receipt of certain foreign gifts; 
• FinCEN Form 114 reporting foreign bank and financial accounts; and
• Form 8938 reporting certain foreign financial assets. 

If a beneficiary or donor of a trust serves as a fiduciary, this potentially creates an estate tax inclusion risk and special provisions will be needed in the trust instrument to ensure that the tax objectives of the planning are not jeopardised.

Irrevocable trusts generally cannot be changed or revoked.

Decanting

In recent years, Texas has adopted a decanting statute that allows some changes to be made by decanting the assets of the old trust into a new trust with modified trust provisions. The extent to which modifications are allowed is determined by the trustee’s discretion to make distributions from the old trust. A trustee with full discretion has much greater authority to decant to a new trust with modified trust provisions. A trustee with limited discretion generally cannot decant to a new trust unless the beneficial interests remain unchanged.

Reformations and Modifications

Texas allows judicial reformations and modifications of trusts in various circumstances. Reformations change the terms of the trust effective as of the creation of the trust. Modifications change the terms of the trust effective as of the date of the court order. A common justification for reformations is scrivener’s error. There are more bases for modification, but modification does not have retroactive effect.

Trust planning, involving the creation of irrevocable trusts with spendthrift provisions, can provide asset protection benefits. A beneficiary’s creditors generally cannot reach assets owned by the trustee and held in trust. Trust assets become subject to creditor claims if they are distributed to the beneficiary; therefore keeping assets in such trusts can provide important asset protection benefits. However, Texas law does not provide for the creation of self-settled asset protection trusts; therefore the asset protection benefits of trusts generally only apply to trust beneficiaries in the context of irrevocable trusts created by third parties.

Other important asset protection strategies in Texas include:

• creation of limited liability entities, such as LLCs;
• use of premarital agreements;
• asset transfers between spouses and family members, including in trust for their benefit;
• purchases of insurance products;
• funding of retirement accounts; and
• investment in a residence to use as a homestead.

Individuals and families with substantial wealth, sometimes involving significant closely held operating businesses, often struggle with developing a viable succession plan. While numerous strategies may exist and be employed to transfer wealth to lower generations, a plan for succession of control over entities and property, particularly with respect to control of significant closely held operating businesses, can be much more challenging to create and much more nuanced in substance and implementation. Succession plans are often incorporated within other planning vehicles, such as trusts, LLCs, limited partnerships, and corporations. With significant closely held operating businesses, use of various strategies may be appropriate, including without limitation: robust company or partnership agreements; shareholders’ agreements; buy/sell agreements; insurance programmes; and board structures, potentially involving business managers and/or outside directors. Sometimes an actual succession plan, setting forth a specific succession of governing persons and management provisions, may be appropriate. Family conflict with respect to succession plans is often best avoided by creating a clear and robust succession plan well in advance of need and coupling it with transparency, so all the stakeholders are fully aware of the plan, including before implementation.

In Texas, valuation discounts due to lack of control and lack of marketability are important estate planning tools for tax-efficient transfer of wealth to lower generations. Often, ownership of property is bundled in a new holding company or partnership, if an appropriate entity for such planning is not already in existence. The entity is structured in a manner that separates control from ownership, either through the appointment of governing persons (ie, managers of an LLC) or through a recapitalisation that creates a class of controlling shareholders or a general partner. Once such an entity is properly structured, non-controlling economic interests are transferred to lower generations, often in trust, without transferring control of the entity. Sometimes this transfer is done as a gift, but often it is wholly or partially done as a sale, perhaps in return for promissory notes that utilise an appropriate AFR as their interest rate. Due to the non-controlling nature of the transferred interests, as well as their inherent lack of marketability (perhaps enhanced by transfer restrictions within the entity’s governing documents), significant valuation discounts might apply, reducing the transfer costs.

The most significant current driver of family conflict is the unprecedented intergenerational wealth transfer that is occurring in the United States and in Texas. See 2.1 Cultural Considerations in Succession Planning. Often, this intergenerational wealth transfer includes the transfer of significant closely held operating businesses and the transfer of control over these businesses can enhance family conflict, particularly if such control is transferred asymmetrically, or family members perceive inequalities in the transfer of such control and the transfer of control over (and ownership of) other family properties. These family conflicts are playing out in various forums depending on the specific facts, including probate contests involving wills and testamentary transfers, litigation alleging breaches of fiduciary duty in both estate and trust contexts, litigation alleging breach of various duties in business contexts, and marital disputes.

Texas law provides many potential remedies to an aggrieved party in a wealth dispute. The appropriate remedy in a specific circumstance is highly fact dependent and may include, without limitation:

• the requirement for accountings;
• the award of monetary damages, including compensatory damages, attorneys’ fees, and punitive damages;
• the granting of temporary restraining orders and injunctions;
• the issuing of orders compelling fiduciaries to perform certain duties and undertake certain actions;
• the issuing of declaratory judgments;
• the ordering of trust reformations;
• the ordering of rescissions of a trust instrument or other transaction;
• the reduction of fiduciary compensation;
• the ordering of the posting of fiduciary bonds;
• the removal and replacement of fiduciaries;
• the appointment of guardians;
• the imposition of liens;
• the imposition of receiverships; and
• the imposition of constructive trusts.

The use of corporate fiduciaries, either as executors or trustees, or in other fiduciary and agency capacities, is prevalent in Texas. There are likely hundreds of foreign (non-Texas) national and international financial institutions operating in Texas and offering fiduciary services, either directly or through a dedicated subsidiary such as an affiliated trust company. In addition, many Texas state-chartered banks, and quite a few independent Texas trust companies, offer fiduciary services. It is very common for an estate plan to include a corporate fiduciary, at least as a fiduciary of last resort, and corporate fiduciaries routinely serve in nearly every fiduciary and agency capacity in Texas.

If a fiduciary fails to administer an estate or a trust according to the terms of the will or trust instrument, or fails to act in accordance with the law, or otherwise breaches their duties, a beneficiary can bring suit against the fiduciary and seek various remedies, as discussed in 5.2 Mechanism for Compensation. Beyond the terms of the will or trust instrument, as the case may be, and beyond the provisions of the Texas Code, a fiduciary owes a beneficiary various duties arising from the common law, including, without limitation, a duty of loyalty, a duty of care, and a duty of good faith and fair dealing. Importantly, a fiduciary may be personally liable for monetary damages if the fiduciary breaches their fiduciary duties.

Various mechanisms exist to protect a fiduciary from personal liability, including, without limitation:

• statutorily approved delegation of certain activities by the fiduciary, such as investment management, to qualified persons;
• directed trusts that, by their terms, delegate certain activities to a certain person or group of persons, such as investment management or decisions regarding distributions;
• exoneration or reimbursement for certain expenses incurred in connection with estate or trust administration;
• fiduciary liability insurance and similar insurance products;
• periodic accountings to provide adequate disclosure and begin the running of applicable statutes of limitations with respect to certain potential claims;
• court approval of fiduciary accountings;
• exculpatory provisions in wills and trust instruments, which limit liability with respect to acts and omissions that may constitute simple negligence or even gross negligence;
• indemnification provisions in wills and trust instruments, which allow for indemnification of the fiduciary in certain circumstances; and
• releases from beneficiaries for certain acts and omissions or for certain periods of service.

In Texas, fiduciary actions are significantly regulated by the Texas Estates Code and the Texas Trust Code, among other statutes. These laws have codified much of what previously was part of the common law governing fiduciary actions. One important part of the regulations is the Texas Uniform Prudent Investor Act found in Chapter 117 of the Texas Trust Code, which codified the prudent investor rules, subject to modern portfolio theory. See 6.4 Fiduciary Investment.

Under Texas law, a trustee has a duty to comply with the Texas Uniform Prudent Investor Act unless otherwise provided in the trust instrument. Under the prudent investor rule, a trustee has a duty to invest and manage trust assets as a prudent investor would, considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying the standard of prudence, the trustee must exercise reasonable care, skill and caution. In light of this, a trustee has a duty to diversify trust investments unless they reasonably determine that, because of special circumstances, the purposes of a trust are better served without diversifying. For example, the duty to diversify may be avoided if a beneficiary has unusual opportunities or risks, the settlor demonstrates an intent that the trustee retain or purchase certain assets, the trust holds a restricted asset or one that is meaningful to the settlor or beneficiary, or negative tax implications would arise due to diversification. Such assets may include active and/or closely held businesses. The trust instrument also may relieve the trustee of any duty to diversity.

Regardless, a trustee’s investment and management decisions respecting individual assets must be evaluated not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust. The trustee is required to consider a wide set of circumstances in investing and managing trust assets, as they are relevant to the trust or its beneficiaries. This essentially encapsulates modern portfolio theory.

Foundations have a number of special limitations with respect to investments, including rules prohibiting excess business holdings and jeopardising investments.

Requirements in the United States

Domicile

A person is a domiciliary of the United States if they live in the United States with no intent to leave (ie, they intend to stay in the United States indefinitely) and, if they are temporarily away from the United States, they intend to return to the United States. The test with respect to domicile is a facts and circumstances test, involving an examination of numerous aspects of a person’s life. A person’s domicile is important because it is one of the two bases for imposition of US transfer taxes with respect to a person’s worldwide estate. See the discussion regarding US transfer taxes in 1.1 Tax Regimes.

Residency

A person is a resident of the United States if they have the requisite presence in the United States (ie, according to the “substantial presence test”) or if they are a long-term permanent resident (ie, a “green card” holder). US residency has implications for US income tax, as discussed in 1.1 Tax Regimes. 

Citizenship

Generally, a person becomes a citizen by being born to a citizen parent, being born in the United States, or naturalised. However, the legality of birthright citizenship is currently being challenged in certain circumstances and related lawsuits are pending before various federal courts. Citizenship is important because it is one of the two bases for imposition of US transfer taxes with respect to a person’s worldwide estate. See the discussion regarding US transfer taxes in 1.1 Tax Regimes.

Domicile, Residency and Citizenship in Texas

Domicile in Texas has little, if any, relevance under Texas law. Citizenship with respect to Texas has no meaning under Texas law. Residency in Texas has some relevance with respect to severing tax residency in a former taxing jurisdiction and qualifying for in-state tuition at certain Texas schools. However, there is no general test for residency (ie, there is no minimum number of days required), except with respect to in-state tuition, which generally requires a person to have lived in Texas for 12 consecutive months (or 36 months before graduating from high school).

There is currently no expeditious citizenship programme in the United States (eg, there is no citizenship-by-investment or similar programme). However, requests to expedite the adjudication of a naturalisation application and related proceedings are considered, and may be accepted on a case-by-case basis.

In Texas a court may appoint a guardian to make decisions for a person who lacks capacity, whether the incapacity is the result of age or otherwise. The incapacitated person is referred to as the “ward”. A guardian may be appointed for the ward’s person, estate or both. The guardian of the person is responsible for decisions involving day-to-day living, healthcare, and similar matters. The guardian of the person is responsible for decisions involving financial affairs and property. A guardian’s power may be broad or may be limited in various ways, preserving ungranted powers for the ward to the extent that the ward is deemed to have decision-making capacity. In Texas, a guardianship proceeding is often initiated with a court petition by an interested party and initially results in the appointment of a temporary guardian with limited powers, as the circumstance requires. During the guardianship proceeding to determine if a permanent guardian will be appointed, the proposed ward has the right to counsel and an attorney will be appointed to represent the proposed ward if one has not already been retained.

In Texas there has been a significant push to create effective alternatives to guardianship for the purpose of allowing potential wards to continue to make their own decisions to the greatest extent possible, thereby reducing or eliminating the need for formal guardianships of either the person or the estate. Some alternatives to guardianship include, without limitation:

• using “supports and services”, whether formal or informal;
• supported decision-making agreements;
• statutory durable and medical powers of attorney;
• inter vivos trusts, including revocable trusts;
• special and supplemental needs trusts, whether self-settled or created by third parties;
• Section 1301 management trusts; and
• Uniform Transfers to Minors Act (UTMA) accounts.

Guardians are appointed by the court. However, individuals can specify during life whom they would like to serve as the guardian of their person, estate, or both if the need should arise and the court will consider such requests. Guardians are subject to ongoing supervision by the court and are required to periodically account to the court regarding the ward and their actions as guardian.

Long-term care insurance has become more available and its use has gained in popularity over the past two decades as the post-World War II “baby boomer” generation entered retirement, and demographics in the United States and Texas shifted towards an older population. See 8.1 Special Planning Mechanisms.

Adopted Children

In Texas an adopted child is treated as a legal descendant of their adoptive parent or parents, meaning the adopted child and the adopted child’s descendants will inherit from and through the adoptive parent or parents in the same manner as a biological child. However, in Texas the rights of an adopted child to inherit from their biological parents is not severed unless they are adopted as an adult, or the court by order specifically provides for such severance.  Regardless, once a child is adopted, their biological parent(s) and the kindred of their biological parent(s) may not inherit from or through an adopted child.

Out-of-Wedlock Children

In Texas the mother-child relationship is established by a woman giving birth to a child; however, it can also be established by adjudication of maternity and by adoption. Contrastingly, the father-child relationship is commonly based on a presumption if the father is married to the mother at the time of the child’s birth, although this presumption may arise in other circumstances too. A father-child relationship can also be established by other methods, including, without limitation, by adjudication of paternity, by adoption, and by acknowledgement of paternity. The Texas Family Code provides a specific process for the voluntary acknowledgement of paternity.

Posthumously Conceived/Born Children

Under the Texas Estates Code “no right of inheritance accrues to any person unless the person is born before, or is in gestation at, the time of the intestate’s death and survives for at least 120 hours. A person is: (1) considered to be in gestation at the time of the intestate’s death if insemination or implantation occurs at or before the time of the intestate’s death; and (2) presumed to be in gestation at the time of the intestate’s death if the person is born before the 301st day after the date of the intestate’s death”. Rights of inheritance can be changed by the terms of a will or trust; so, the testator or grantor should carefully consider whether or not to deliberately include posthumously conceived children, with the understanding that this could create various practical and theoretical problems unless thoughtfully and carefully done.

Assisted Reproduction: Donor Gametes and Surrogacy

In Texas assisted reproduction is legal and a well-established service. This includes the use of donor gametes (eggs and sperm). It also includes traditional surrogacy in which the gestational mother utilises her own egg. And it includes gestational surrogacy in which a woman agrees to carry to gestation a child to whom she is not genetically related. Gamete donation can be coupled with both traditional and gestational surrogacy in appropriate circumstances. The donation of gametes should be done pursuant to egg donation agreements and sperm donation agreements that address the parties’ legal rights. Traditional surrogacy is not specifically provided for under Texas law and, though it should be done pursuant to a surrogacy agreement, the rights of the gestational mother cannot be severed in advance of the birth. The rights of the gestational mother can only be severed after birth and this is done in a proceeding similar to an adoption proceeding. This creates significant uncertainty and makes traditional surrogacy a less attractive method. Contrastingly, the Texas Family Code specifically provides for gestational surrogacy and gestational surrogacy agreements, which are subject to review and validation by the court, which then may issue an order determining the parental rights of the parties, either in advance of or after the birth. If done in advance of the birth, this is known as a pre-birth order.

Same-sex marriages are recognised by both Texas laws and the US federal government.

Charitable giving is highly incentivised under the US tax code. Charitable gifts during life and at death are not subject to US transfer tax. Further, lifetime charitable gifts can qualify the donor for substantial tax deductions equivalent to the value of the property given, subject to certain limitations. The value of cash gifts to public charities is deductible up to 60% of the donor’s adjusted gross income (AGI). The fair market value of marketable securities, real estate, and closely held assets is deductible up to 30% of the donor’s AGI. If making gifts to a foundation, these limits are reduced to 30% of AGI for cash gifts and 20% of AGI for gifts of marketable securities, real estate, and closely held assets; provided, the deduction with respect to gifts of real estate and closely held assets is further limited to the donor’s cost basis, rather than fair market value. These thresholds apply in the aggregate, meaning that the value of gifts that are more restricted counts towards the applicable thresholds with respect to gifts that are less restricted.

Numerous strategies exist and are frequently used with respect to charitable planning and gifts, including, without limitation:

• foundations (both operating and non-operating);
• supporting organisations;
• donor advised funds;
• public charities;
• social welfare organisations;
• charitable lead trusts;
• charitable remainder trusts; and
• purpose trusts.

Which strategy is most appropriate for a specific client is highly dependent on the client’s charitable intent and individual facts and circumstances.