Texas Estate Planning for Business Owners: Community Property, Probate, and Succession
Updated: 4 hours ago
By Trenton Roberts and Jay Stigers
Circular 230 / general information notice. This article is general information only. It is not tax, legal, or accounting advice. Reading it does not create an attorney-client relationship. Tax results depend on your facts and on law that can change. Consult your own attorney and CPA before taking any action. This article was not written to be used, and cannot be used, to avoid tax penalties.
Texas estate planning has a reputation for being simple. There is no state estate tax and no state inheritance tax, probate here is friendlier than in many states, and the federal exemption is $15 million per person in 2026. For business owners, though, Texas law adds features that a plan drafted for another state can miss: community property, a powerful homestead, and probate tools that sometimes make a living trust unnecessary and sometimes make it essential. This article walks through the points we raise most often with Texas owners, and how they interact with the federal tax rules discussed in our piece on estate planning for business owners after OBBBA.
Community property and the double basis step-up
Texas is a community property state. Property acquired during marriage is presumed to be community property, and a spouse who claims otherwise must prove separate character by clear and convincing evidence under Section 3.003 of the Texas Family Code. Separate property is generally what a spouse owned before marriage or acquired by gift, devise, or descent (Family Code Section 3.001).
The federal tax payoff is in Section 1014(b)(6) of the Internal Revenue Code. When one spouse dies, both halves of community property are treated as acquired from the decedent for basis purposes, as long as at least half was included in the decedent's gross estate. Both halves get a new basis equal to fair market value at death.
A worked example. A married couple bought a warehouse during marriage for $1,000,000. Depreciation has brought the adjusted basis down to $400,000, and the building is worth $5,000,000 when the husband dies. Because it is community property, the surviving wife takes a $5,000,000 basis in the entire building. If she sells it the next month for $5,000,000, there is essentially no gain, and she can start depreciation over on the new basis. If the same couple had lived in a common-law state and held title jointly, generally only the decedent's half would be stepped up. The survivor would face gain on her half, about $2.3 million of it in this example.
Texas also lets spouses change character by agreement. A partition or exchange agreement can turn community property into separate property, and since the 1999 amendment to the Texas Constitution, spouses can agree under Subchapter C of Chapter 4 of the Family Code to convert separate property into community property. Conversion can capture the double step-up on a highly appreciated separate asset. The cost is real: the converted asset becomes subject to division on divorce and to community creditor rules. The statute also sets disclosure and formality requirements, so this is not a form to sign without independent advice for each spouse.
A note on community property trusts. Several states have statutes that let couples elect community property treatment through a trust. As of this writing, Texas has not enacted such a statute, and Texas couples do not need one, because their marital property is already community by default. What they do need is a trust or will that keeps community property identified as community, so the step-up is preserved.
Community property inside a closely held business
Ownership of a business is where characterization gets hard. Suppose a founder formed her LLC two years before marriage. The membership interest is her separate property. During a twenty-year marriage, her work grew the company from $200,000 to $15 million. Texas generally treats the increase in value of separate property as separate, but the community may have a reimbursement claim if community time, talent, and labor built the separate asset without reasonable compensation. The Texas Supreme Court discussed that framework in Jensen v. Jensen, 665 S.W.2d 107 (Tex. 1984), and Section 3.402 of the Family Code now lists the reimbursement categories. Distributions the LLC pays during marriage are generally community income.
At death, the character question decides what each spouse can leave by will. Each spouse can devise only his or her own separate property and his or her half of the community. That has a consequence owners often miss. If the non-owner spouse dies first and owns a community half of the owner spouse's company interest, that half passes under the non-owner's will. If the will leaves everything to the children, the children now hold an economic interest in the company. The company agreement should address this: a purchase right or option when a non-member spouse dies or divorces, a spousal consent signed by each member's spouse, and a valuation method that matches the main buy-sell provisions.
Section 3.102 of the Family Code gives a spouse sole management of community property he or she would have owned if single, such as earnings and business interests titled in that spouse's name. Management rights during life are not the same as ownership at death. Plan for both.
Revocable trusts versus Texas independent administration
In many states, the main argument for a revocable living trust is avoiding a slow, expensive, court-supervised probate. Texas has independent administration under Chapter 401 of the Estates Code. A will can request it, and in an intestate estate the distributees can agree to it under Section 401.003. Once the court appoints an independent executor and approves the inventory, the executor can usually pay debts, sell assets, and distribute property with little further court involvement. Texas also offers muniment of title (Chapter 257) for some estates with no unpaid debts other than those secured by real estate liens, and a small estate affidavit (Chapter 205) for intestate estates whose assets, excluding the homestead and exempt property, are $75,000 or less.
Because Texas probate can be efficient, a well-drafted will is enough for some families. For business owners, we usually weigh these factors:
Incapacity. A will does nothing while you are alive. If an owner becomes incapacitated, a funded revocable trust with a named successor trustee can keep voting the company interest and signing for the business without a guardianship. A statutory durable power of attorney helps too, but many banks and counterparties treat a trustee with title as a cleaner signer.
Continuity in the gap. Even independent administration requires an application, a hearing, and letters testamentary before the executor can act. A successor trustee can act on the day of death, which matters when payroll is due on Friday.
Privacy. A probated will and inventory become public court records. A trust agreement generally does not.
Real estate in other states. Real property outside Texas can require ancillary probate in that state. Holding it in a trust or an entity avoids that.
The four-year rule. Under Section 256.003, a will generally must be offered for probate within four years of death unless the applicant was not in default. Families who put off probate lose options.
The downside of a trust is funding. A trust that never received title to the company interest, the brokerage account, or the real estate does very little. When we set one up, the assignment of the membership interest, the updated member ledger, and new deeds are part of the job, not an afterthought.
Texas also has nonprobate tools for single assets: transfer on death deeds under Chapter 114 of the Estates Code, and survivorship agreements between spouses for community property under Chapter 112. These are useful for a residence or an account. They are poor tools for a business interest that needs management and a buy-sell.
Succession for closely held entities
Estate documents and company documents have to agree. The questions we work through with each owner:
Who votes the interest the day after death? The company agreement should say whether the estate or trust becomes a member with voting rights or holds only an assignee's economic interest until admitted.
Is there a buyer, and how is the price set? A formula or appraisal process, a funding source such as insurance or an installment note, and a closing deadline that fits the estate's cash needs.
Is the company an S corporation? If so, every trust that will hold shares must be an eligible shareholder. A revocable trust is a grantor trust while the owner is alive. After death, Section 1361(c)(2)(A) generally gives that trust, or a trust that receives stock under a will, a two-year window as an eligible shareholder. After that, the trust needs a timely QSST or ESBT election or the S election can terminate. That deadline is easy to miss in the middle of an estate administration.
Who manages, and who just owns? Voting and nonvoting units let the child who runs the company control it while siblings share the value.
What happens on a spouse's death or divorce? As above, the non-owner spouse's community half needs a plan.
The Texas homestead and exempt property
The Texas homestead is protected from forced sale for most creditor claims under Article XVI, Section 50 of the Texas Constitution. Property Code Section 41.002 sets the size: an urban homestead of up to 10 acres in contiguous lots, and a rural homestead of up to 200 acres for a family or 100 acres for a single adult. Section 41.0021 lets a homestead held in a qualifying trust keep its protection, which is why a Texas revocable trust should be drafted to meet that definition if the residence will be transferred into it. The property tax homestead exemption is separate, and a trust needs to qualify under the Tax Code as well.
At death, Article XVI, Section 52 and Chapter 102 of the Estates Code give a surviving spouse the right to occupy the homestead for life, as long as the spouse elects to use it as a homestead, regardless of who inherits title. That right can collide with a will that leaves the house to children from a prior marriage. A plan for a blended family should address it head on.
Personal property is protected too. Property Code Section 42.001 exempts listed personal property up to an aggregate fair market value of $100,000 for a family or $50,000 for a single adult. In an estate administration, Chapter 353 of the Estates Code lets the court set aside exempt property for the surviving spouse and minor children and provides a family allowance.
Blended families and adopted children
Intestacy in Texas has a trap for blended families. Under Section 201.003 of the Estates Code, if a spouse dies without a will and leaves a child who is not also a child of the surviving spouse, the decedent's half of the community passes to the decedent's children, not to the surviving spouse. For a business owner with children from a prior marriage, dying without a will can make a stepparent and stepchildren co-owners of the family company.
Adopted children are treated as children of their adoptive parents for inheritance. Section 201.054 says an adopted child inherits from and through the adoptive parents as if the child were their natural child. Even so, we always read how older trust documents define "children" and "descendants," because a document drafted decades ago by a grandparent may use language narrower than the statute.
Parents of minor children should also sign a written declaration designating a guardian under Chapter 1104 of the Estates Code, and name an alternate. A guardian of the person and a trustee of the money can be different people, and often should be.
A Texas estate planning checklist for owners
Inventory every asset and label it community or separate, with the documents that support the label.
Confirm the company agreement has transfer, spousal consent, and buy-sell terms that match the will or trust.
Decide whether a funded revocable trust is worth it based on incapacity, continuity, privacy, and out-of-state property.
Check S corporation trust elections and calendar the two-year deadline.
Draft the homestead plan around the surviving spouse's occupancy right.
Sign a guardian designation and a statutory durable power of attorney.
Questions owners ask
We moved to Texas from a common-law state. Is our old property now community property?
Not automatically. Property generally keeps the character it had under the law of the state where you lived when it was acquired. Texas applies a quasi-community property concept in divorce, but not at death. Moving here does not by itself give your old assets the double step-up, which is one reason a conversion agreement sometimes makes sense.
Does a revocable trust protect assets from my creditors?
No. A trust you can revoke does not shield assets from your own creditors during your life. The Texas homestead and personal property exemptions protect specific assets whether or not they sit in a trust.
Our estate is under $30 million. Do we still need any of this?
The federal estate tax may not apply, but the probate, community property, homestead, and business succession issues apply to every Texas family that owns a company. Those are usually where the real money is lost.
How we can help
We coordinate the will, trust, company agreement, and buy-sell so they work together, and we work alongside your CPA and financial adviser.
If you want to go through your own plan, email info@robertsandwillie.com or call (469) 910-4017. Sending a message does not create an attorney-client relationship.
Disclaimer. This article is for general information only and is not tax, legal, or accounting advice. It does not create an attorney-client relationship. Tax law changes and depends on your specific facts. Do not act on this article without consulting your own attorney and CPA. This article is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable law. Attorney Advertising. Roberts & Willie, PLLC, Dallas, Texas; Trenton Roberts, responsible attorney.
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