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Do You Pay Taxes on a Trust Inheritance in Texas? What Beneficiaries Need to Know

If you’ve recently inherited money from a trust, you may be wondering: Do you pay taxes on a trust inheritance? While Texas is known for being an estate tax-friendly state, the truth is, some trust income can be taxable depending on how the trust is structured and what type of assets are distributed.

At The Lange Firm, we help beneficiaries, trustees, and estate administrators across Texas understand the tax implications of trust inheritances. Whether you’ve received a lump sum or ongoing payments from a trust, here’s what you need to know about how your inheritance could affect your tax bill—and how to avoid costly mistakes.

Are Trust Inheritances Taxable in Texas?

Let’s start with the good news: Texas does not have a state inheritance or estate tax. This means that if you inherit assets through a trust, Texas won’t tax the inheritance itself.

However, that doesn’t mean you’re entirely off the hook. Depending on:

• The type of trust
  
  
• The source of the income
  
  
• Whether the trust earned money before distributing it
  
  
• The timing of the distribution
  
  

…you may owe federal income taxes on certain portions of what you receive.

Types of Trusts and Tax Implications

✅ Revocable Living Trusts

• Often used for probate avoidance
  
  
• The assets in these trusts are treated as the grantor’s own property until death
  
  
• Upon the grantor’s death, the trust becomes irrevocable
  
  

Tax impact for beneficiary:

• If you inherit cash, property, or investments, you typically don’t owe income tax on the value at the time of inheritance
  
  
• However, if the assets produce income (like dividends or interest), you may owe tax on that income
  
  

✅ Irrevocable Trusts

• Once created, cannot be changed or revoked without court or beneficiary consent
  
  
• The trust is its own legal entity and may pay taxes or pass them along to the beneficiary
  
  

Tax impact for beneficiary:

• If you receive trust income, you may owe income tax on the amount distributed to you
  
  
• The trust must send you a Schedule K-1 (Form 1041) each year showing your share of income to report on your taxes
  
  

💡 The Lange Firm works with estate planners and CPAs to help beneficiaries understand K-1s and minimize tax consequences.

Tax-Free vs. Taxable Trust Distributions

Tip: The IRS generally allows for a “step-up” in basis on inherited assets, meaning you won’t owe capital gains tax on appreciation that occurred during the original owner’s lifetime.

Do You Pay Estate Tax on Trust Inheritance?

Federal Estate Tax:

• In 2024, only estates worth more than $13.61 million are subject to federal estate tax
  
  
• If the trust’s total value is below this threshold, no federal estate tax applies
  
  

Texas Estate Tax:

• Texas does not have an estate or inheritance tax, so beneficiaries are not taxed by the state
  
  

That said, trusts must still file tax returns, and if income is passed to you, you must report it—even if the inheritance isn’t taxable itself.

Reporting Trust Inheritance on Your Tax Return

If you receive distributions from a trust, you may receive a Schedule K-1 (Form 1041). This form reports:

• Your share of trust income
  
  
• Deductions and credits passed to you
  
  
• Taxable interest, dividends, and capital gains
  
  

You must report this income on your individual tax return (Form 1040). Failing to do so could result in IRS penalties or audits.

📌 Not sure how to report your trust income? The Lange Firm can coordinate with your tax advisor to make sure everything is reported accurately and on time.

When Should You Contact a Lawyer About Trust Inheritance?

You should speak with an attorney if:

• You don’t understand your K-1 or trust distribution paperwork
  
  
• You think the trust was mismanaged
  
  
• You’re unsure whether your inheritance is taxable
  
  
• You’ve received property or investments and want to minimize future tax consequences
  
  
• You believe you were wrongly excluded from a trust
  
  

At The Lange Firm, we help beneficiaries make sense of complex estate and trust documents and take legal action if something isn’t right.

How The Lange Firm Helps Texas Beneficiaries and Families

At The Lange Firm, we offer:

• Trust and estate inheritance reviews
  
  
• Help understanding K-1s and IRS reporting requirements
  
  
• Advice on managing inherited investments or real estate
  
  
• Legal support for disputes between trustees and beneficiaries
  
  
• Coordination with CPAs and financial advisors to plan for future tax obligations
  
  

📞 Contact The Lange Firm today to protect your inheritance and understand your tax responsibilities.

Final Thoughts

So, do you pay taxes on a trust inheritance in Texas? The inheritance itself is often not taxable, but income from the trust may be—and understanding the difference is key to avoiding IRS trouble and protecting your finances.

✅ Whether you’re receiving income, property, or both, The Lange Firm can help you make sense of your inheritance and ensure your tax reporting is accurate and compliant.