TEXAS, AN EXTREMELY ATTRACTIVE STATE TO ACCUMULATE, PRESERVE AND TRANSFER WEALTH

Legal and Historical Context

Right from the start, let me point out that Texas provides significant advantages for wealth accumulation, preservation and transfer because Texas Constitution Article 8, Section 1 does not grant the legislature authority to tax individual’s personal income.  Thus, the Texas Supreme Court has never had to struggle with whether the Courts of Texas could tax incomes in the silence of the legislature.  At the federal level, the U.S. Supreme Court early in American jurisprudence adopted a doctrine interpreted from Article 1, Section 8, Clause 3 of the U.S. Constitution commonly referred to as the “Dormant Commerce Clause Doctrine” based on what the Court says is the self-activation nature of this federal Constitutional provision.  No such argument has ever been made by the Texas Supreme Court as it relates to Texas Constitution Article 8, Section 1.  Therefore, authority to tax Texans’ income is simply unconstitutional and, that fact alone, contributes tremendously to Texans’ power to accumulate, preserve and transfer personal wealth. This  economic philosophy goes all the way back to the Boston Tea Party and the revolt against the British crown’s ‘tea tax’.  The federal government first rejected a tax based on incomes but amended the U.S. Constitution in 1913 (Amendment No 16 modifying Article 1, section 9 of the U.S. Constitution) which adopted the income tax path.  Texas has never amended its Constitution to permit a personal income tax.  Thus, the State has a regressive economic approach taxing consumption while the federal government has a progressive economic approach taxing personal wealth. As for federal income tax, the U.S. Supreme Court has never asserted that Amendment XVI  is self-executing .  That Consitutional Provision states; in part that, “The Congress shall have the power to lay and collect taxes on incomes…”.  Thus, there is no such SCOTUS doctrine  relating to a “Dormant Tax Clause”. 

Texas Legal Framework Explained

Texas is a Community Property state.  This fact has a tremendous impact on Texans’ ability to  accumulate, preserve and transfer wealth in the state.  The  clear understanding the Community Property laws of  Texas is quintessential to effective estate planning, tax planning and asset protection planning in the State as the attorneys at Coleman Jackson, Professional Corporation can explain with specificity during an initial consultations.  

Why does Texas’ legal framework impacting Texans’ ability to accumulate, preserve and transfer wealth create such a tremendous advantage?

Texas State Tax Advantages

Texas provides substantial tax advantages for wealth accumulation because the Texas Constitution does not grant the legislature authority to tax individual incomes. Texas Constitution Article VIII, Section 1(c) permits the legislature to “tax incomes of corporations other than municipal” but makes no provision for individual income taxation.  See Texas Constitution Article 8, § 1. This creates significant savings compared to high-tax states, with top earners potentially saving between 2.5% to 15% annually on state income taxes.

The state does impose a franchise tax on business entities under Texas Tax Code Chapter 171. However, this tax applies to business entities rather than individuals.  The tax is computed on business margins and the rate of the franchise tax is 0.75 percent of taxable margin pursuant to Texas Tax Code § 171.002. The majority of businesses in Texas does not pay any franchise tax because their income falls below the taxable income threshold.  With the exception of sole-proprietorships, all other types of  business entities structured within the State or doing business in the State, must file annual franchise tax reports.  Property taxes remain the primary state and local tax obligation of business entities and individuals.  However, individuals can apply for various homestead tax exemptions on residential property.  In 2025 the Texas Legislature increased the amount of the residential homestead exemption pursuant to Texas Tax Code § 11.13.  Nevertheless, Texas property tax remains one of the highest in the nation.  Property tax, like other regressive tax schemes, is a consumption tax.  Texas Sales and Use Tax, another major Texas tax is a  regressive tax that provides over 50% of Texas tax revenues today.  But even in the context of Texas regressive taxing regime, Texas provides substantial tax advantages for all Texans by not taxing personal income.  Texans are likely to have far more personal  control when planning when purchasing real property or personal tangible property purchases.  The bigger question in Texas is whether property is classified as separate property or community property.  Let’s take a closer look at this issue.

Texas Community Property Laws and Estate Planning

Texas operates under a community property system established through the community property presumption that creates unique opportunities for estate planning and wealth transfer.  See the Texas Family Code § 3.003. Under Texas Family Code Section 3.003, property possessed by either spouse during marriage is presumed to be community property unless proven to be separate property by clear and convincing evidence. Separate property includes property owned before marriage and property acquired during marriage by gift, devise, or descent Texas Family Code § 3.001.  But even separate property can become community property through comingling it with community property as the SALT tax lawyers at Coleman Jackson, P.C. can explain.

The community property system provides significant tax advantages through the stepped-up basis rules. Upon the death of one spouse, the entire value of community property receives a stepped-up basis to fair market value, not just the deceased spouse’s half (26 USCA § 1014- Internal Revenue Code). This eliminates built-in capital gains on appreciated community property and can result in substantial income tax savings for the surviving spouse.

Under Texas Estates Code Section 201.003, if an intestate decedent leaves a surviving spouse but no children or descendants, the community estate passes entirely to the surviving spouse  pursuant to Texas Estates Code § 201.003. This default rule supports wealth preservation within families while providing flexibility for married couples to structure their estate plans around community property principles.  This Texas approach provides substantial advantages.  However these community property rules  and related federal tax lawsare complex and it’s important to consult  with an estate planning  and tax attorney.  A sight misunderstanding or misapplication of the rules can unravel your entire estate plan.  Out of staters moving into Texas from out of state must take extra care to make sure their old plans still work in Texas as they intended.  There is a tremendous risk that estate plans drafted somewhere outside of Texas does not work anymore. This is particularly true with respect to plans using entity structuring.  Foreigners must be prudent and counsel with Texas estate planning and immigration counsel because this fact alone can potentially create tons of additional  estate and asset protection challenges.

Business Entity Structures for Asset Protection

Beneficial Ownership Information Reporting is mostly suspended for now due to an Executive Order; but the Corporate Transparency Act of 2021 (“CTA”) that is enforced by the Financial Crimes Enforcement Network, an agency of the U.S. Treasury is still on the books.  It’s very unlikely that SCOTUS will rule that an Executive Order can set aside a federal statute.  Several cases are pending challenging the CTA; but SCOTUS has not ruled, yet on any of them at the writing of this blog.  Texans structuring business entities as a part of their estate plan should consider the Corporate Transparency Act, consider the CTA’s requirements and comply with the beneficial ownership reporting rules.  Usually, wealthy individuals’ goal is to hide their wealth whereas the CTA’s goal is transparency. The CTA potentially could have a significant impact on estate planning as the estate planning lawyers at Coleman Jackson, P.C. can advise. 

Nevertheless today, Texas business entity structures can be used to serve Texans’ various wealth accumulation, preservation and asset protection goals. Limited liability companies offer operational flexibility while providing liability protection for owners. Professional limited liability companies are available specifically for licensed professionals including doctors, lawyers, engineers and other professionals allowing them to maintain professional licensing while obtaining liability protection pursuant to Texas Business Organizations Code § 301.003.

Professional entities under Texas Business Organizations Code Chapter 301 permit doctors, lawyers, engineers and other professionals to operate through professional associations, professional corporations, or professional limited liability companies while maintaining required professional licensing pursuant to Texas Business Organizations Code § 301.003. These structures can provide liability protection while allowing for tax-efficient business operations and succession planning.  Again, keep in mind that these types of organizations or entity structures are subject to reporting to FinCEN pursuant to the Beneficial Ownership Information Reporting requirements of the CTA.

Speaking of corporate transparency, asset protection strategies themselves remain subject to fraudulent transfer laws under Texas Business & Commerce Code Chapter 24 (Texas Business & Commerce § 24.005). Transfers made with intent to hinder, delay, or defraud creditors can be set aside, limiting the effectiveness of asset protection planning that does not comply with fraudulent transfer law requirements. This simply highlight how important it is to find a counseling estate planning and tax lawyer. Poorly drafted estate plans can; at a minimum, cause Texans to miss their mark or goals in planning, and at worst, expose Texans to legal jeopardy, including but not limited to, criminal prosecution.

Key Takeaways State Specific 

The absence of individual income tax authority in Texas provides immediate and ongoing benefits for wealth accumulation, preservation and transfer, potentially saving high-income professionals hundreds of thousands of dollars annually compared to high-tax states. This advantage becomes particularly pronounced for financial executives with substantial investment income and doctors, lawyers, engineers and others with high W-2 earnings.

The community property system creates automatic tax benefits through stepped-up basis rules but requires careful planning to maximize advantages. Professional couples may benefit from converting separate property to community property through written agreements to capture stepped-up basis benefits, while also considering the liability implications of community property status.

High-income earners approaching the estate tax exemption levels should consider accelerated gift-giving strategies given potential changes to current exemption amounts. The current $15 million basic exclusion amount provides substantial planning opportunities that may not be available if exemptions are reduced in the future.

Foreign account reporting requirements demand strict compliance regardless of tax owed. The severe penalties for willful violations, combined with court decisions showing nuanced analysis of willfulness and reasonable cause, make professional compliance assistance essential for any taxpayer with foreign financial interests.

Multi-jurisdictional System – Federalism Implications Cannot Be Ignored

The United States of America’s  governmental system is multi-jurisdictional.  That simply mean that the United States consists of multiple sovereigns:  the federal government,  the several state governments, the various tribal government(s) and numerous local governmens.  For now (for the purpose of this particular blog) we will skip any further discussions of ‘local government impacts’ on Texans ability to accumulate, preserve and transfer wealth because (to some extent) the State governments can, to some extent, temper and even eliminate municipalities and other localities power to tax.  Likewise, we will skip ‘tribal government(s)’ power to tax based in federal treaties.  

However, the federal government’s authority to tax, its scope and implications are enormous and cannot be ignored.  So, let’s wrap up this blog by taking a very close look at federal law and its impacts on Texans’ ability to accumulate, preserve and transfer wealth.

Federal Tax Framework on Texans’ Ability to Accumulate, Preserve and Transfer Wealth

Federal Tax Framework—

The federal income tax system imposes significant obligations on high-income professionals through a progressive rate structure. Under Internal Revenue Code Section 1, the highest marginal tax rate of 37% applies to taxable income exceeding $626,350 for single filers and $751,600 for joint filers based on 2025 tax tables at  26 USCA § 1 (Internal Revenue Code). The tax base is expansive under Section 61, which defines gross income as “all income from whatever source derived,” including compensation, investment income, and business profits 26 USCA § 61 (Internal Revenue Code). The progressive tax system, in theory, rest upon this premise— the more one makes the more one pays in income taxes.  But this has never been true and it’s not true today!  The impacts of the Corporate Transparency Act’s BOI reporting on estate planning and asset protection are not fully known  at the present time because the Act has been partially postponed by Executive Order.  The CTA and the IRC should be thought of as the federal tax framework impacting Texans’ ability to accumulate, preserve and transfer wealth.

High-income taxpayers also face the 3.8% net investment income tax under Section 1411 on investment income when adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers pursuant to  26 USCA § 1411 (Internal Revenue Code). This additional tax applies to interest, dividends, capital gains, and passive business income, creating an effective top rate of 40.8% on investment income for the highest earners. Estate planning and asset protection techniques are available to minimize and even potentially eliminate these tax ramifications

Federal Estate and Gift Tax System—

The federal estate and gift tax system operates through a unified credit structure that significantly affects wealth transfer planning. Under Internal Revenue Code Section 2010, the basic exclusion amount is $15 million per person effective January 1, 2026, subject to annual inflation adjustments pursuant to 26 USCA § 2010 (Internal Revenue Code). The system includes portability provisions allowing a surviving spouse to use a deceased spouse’s unused exclusion amount, effectively doubling the exemption for married couples to $30 million pursuant to  26 USCA § 2010.  Tremendous estate planning and generational transfer capabilities lie within this area.

Gift tax provisions under Internal Revenue Code Section 2503 provide an annual exclusion for gifts that is $10,000 as adjusted for inflation since 1998, plus unlimited exclusions for tuition payments made directly to educational institutions and medical expenses paid directly to healthcare providers pursuant to 26 USCA § 2503. The gift and estate tax systems are unified, meaning lifetime gifts above the annual exclusion reduce the available estate tax exemption at death pursuant to 26 USCA § 2001.  American physicians, lawyers, engineers and other professionals could consider giving back to America by investing in promising low- income and  middle-income American youth who could be very talented but unable to attend medical school, law school, engineering school or other  professional  schools.  For example today, there is an acute shortage of qualified healthcare workers in America; why not include America’s low income and middle income youth in your  estate plan.  Tremendous estate planning and generational wealth transfer opportunities are available in the federal estate and gift tax system. Failure to invest in American children’s education is potentially societal suicide.  Fundamentally estate planning and asset protection are tools to help individuals to accumulate wealth, preserve wealth and transfer wealth to whomever  they want, however they want and whenever they want.

Federal Tax Retirement, Deferred Compensation Planning and Death Taxes—

Qualified retirement plans provide substantial wealth accumulation and preservation benefits for high-income professionals. Internal Revenue Code Section 401(k) plans allow employee deferrals up to annual limits while providing employer matching opportunities  pursuant to  26 USCA § 401. Section 403(b) plans serve similar functions for employees of tax-exempt organizations and public schools  pursuant to 26 USCA § 403.

Individual retirement accounts under Internal Revenue Code Section 408 provide additional retirement savings opportunities, with traditional IRAs offering current deductions and Roth IRAs under Internal Revenue Code Section 408A providing tax-free growth and distributions pursuant to  26 USCA § 408A. High-income taxpayers may face limitations on deductible IRA contributions and Roth IRA eligibility based on adjusted gross income levels.

Retirement plan assets receive significant creditor protection under federal bankruptcy law. Section 522 of the Bankruptcy Code exempts retirement funds “to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code pursuant to 11 USCA § 522 of the Bankruptcy Code”. This protection extends to most qualified retirement plans and IRAs, with specific dollar limitations for traditional and Roth IRAs.

Finally, the death tax triggering threshold has been set so high in recent years in America that many Texans like most Americans do not have a death tax issue.  In fact, the estate and gift tax exemption is $13.99 million per individual in 2025, and will increase to $15 million per person in 2026 under the One Big Beautiful Bill Act of 2025.  If and when an estate exceeds the exemption amounts; a reasonable estate plan and asset protection goal could be to accelerate and diversity transfers of wealth to people and causes that a decedent loves prior to their demise rather than allowing their wealth escheating to the government.  For example, wealthy individuals could consider giving to America’s promising low-income and middle-income youth by using the vast wealth distribution tools that have been discussed in this blog.

Federal Dual Citizenship Taxation and Foreign Account Obligations—

U.S. individuals, including those with dual citizenship, face reporting requirements for foreign financial assets under the Foreign Account Tax Compliance Act (FATCA). Section 6038D of the IRC requires reporting when aggregate value of specified foreign financial assets exceeds $50,000, with authority for the Secretary to prescribe higher amounts pursuant to 26 USCA § 6038D (Internal Revenue Code).

Courts have consistently imposed substantial penalties for willful violations of foreign account reporting requirements. In United States v. Schwarzbaum, the Southern District of Florida found that the taxpayer’s 2006 FBAR violation was not willful due to reasonable reliance on CPA advice, but violations for 2007-2009 were willful because the taxpayer could no longer reasonably rely on such advice after becoming aware of FBAR requirements through self-preparation of tax forms (like the 1040 tax return) United States v. Schwarzbaum, 611 F.Supp.3d 1356 (2020). In Jarnagin v. United States, the Court of Federal Claims found that sophisticated taxpayers with Canadian accounts did not exercise ordinary business care and prudence regarding their non-willful FBAR obligations, rejecting their claim of reasonable cause Jarnagin v. United States, 134 Federal Court of Claims. 368 (2017).

The foreign tax credit under IRC Section 901 provides relief from double taxation by allowing credits for income taxes paid to foreign countries 26 USCA § 901 (Internal Revenue Code). The credit is subject to limitations under IRC Section 904 to prevent the foreign tax credit from offsetting U.S. tax on U.S.-source income 26 USCA § 904 (Internal Revenue Code). Treaty provisions under IRC Section 7852 govern the relationship between tax treaties and domestic law, with neither having preferential status 26 USCA § 7852 (Internal Revenue Code).

Key Take Aways:  Texas, an Extremely Attractive State to Accumulate, Preserve and Transfer Wealth

The absence of individual income tax authority in Texas provides immediate and ongoing benefits for wealth accumulation, potentially saving high-income professionals hundreds of thousands of dollars annually compared to high-tax states. This advantage becomes particularly pronounced for financial executives with substantial investment income and for doctors, lawyers, engineers and other high-income professions with high W-2 earnings.

The community property system creates automatic tax benefits through stepped-up basis rules but requires careful planning to maximize advantages. Professional couples may benefit from converting separate property to community property through written agreements to capture stepped-up basis benefits, while also considering the liability implications of community property status as international tax, federal tax and SALT tax lawyers at Coleman Jackson, Professional Corporation can explain.

High-income earners approaching the estate tax exemption levels should consider accelerated gift-giving strategies given potential changes to current exemption amounts. The current $15 million basic exclusion amount provides substantial planning opportunities that may not be available if exemptions are reduced in the future.  This is particular true as we see these alarming trends or potential pressures:  Estate and gift tax exemption amounts face likely future changes, creating potential urgency for high-net-worth individuals to utilize current exemption amounts through accelerated gift-giving strategies.  Further annual inflation increases and adjustments likely to continue in various tax thresholds, including gift tax annual exclusions, estate tax exemptions, and income tax bracket thresholds. Estate Planning, Asset Protection and Tax Planning Lawyers point out that these adjustments affect planning strategies and require regular review of wealth transfer techniques to optimize tax efficiency.

State tax competition has intensified as high-tax states increase their rates, making Texas residency even more attractive for wealth preservation. Several states have enacted or increased taxes on high earners, widening the tax advantage gap for Texas residents.  However, no matter the State, asset protection planning limitations under fraudulent transfer laws, including timing requirements, badges of fraud, and creditor protection strategies that comply with applicable statutes are essential regardless of State making consultation and guidance of experienced local legal counsel that much more important.

As the experienced international tax lawyers at Coleman Jackson, P.C. can explain, foreign account reporting requirements demand strict compliance regardless of tax owed. The severe penalties for willful violations, combined with court decisions showing nuanced analysis of willfulness and reasonable cause, make professional compliance assistance essential for any taxpayer with foreign financial interests.  FATCA enforcement has intensified significantly, with federal courts consistently addressing penalties for violations of foreign account reporting requirements. Recent cases demonstrate varied approaches to willfulness determinations, with courts examining both sophisticated and unsophisticated taxpayers’ compliance efforts.  It is helpful and prudent that individuals of dual citizenship, foreign investors, and others with international connections and holdings to consult with attorneys skilled in Immigration Law firm and U.S. Tax Law firm prior to immigrating to the United States, during their long-term stay in the United States and prior to exiting the United States to ensure they are in compliance with American tax laws.   Meaningful International tax planning considerations including pre-immigration planning, expatriation tax consequences, controlled foreign corporation rules, and passive foreign investment company reporting requirements are critical for foreigners and Texans with foreign assets or related complex tax issues.  

Texans; and for that matter, all-American citizens, dual citizens and residents of the United States should keep a lookout for the Corporate Transparency Act’s impacts on their estate plans.

This law blog is written by attorneys at Coleman Jackson, P.C., which is located at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206 for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

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