Estate Planning With Promissory Notes in Texas: Key Tips

Estate planning is about making things easier for the people you leave behind. It is about ensuring that your assets pass smoothly, that your wishes are honored, and that your heirs are not left with a confusing, contentious mess to sort out during an already difficult time. When your estate includes a promissory note secured by Texas real estate, that goal of simplicity becomes more challenging — unless you plan ahead.

A promissory note is not like a bank account or a stock portfolio. It cannot be divided with a keystroke or transferred with a phone call to a brokerage. It is an illiquid, actively managed asset that requires ongoing attention — tracking payments, maintaining records, verifying insurance, dealing with the borrower, and handling the administrative and tax obligations that come with being a private lender. Passing that responsibility to heirs who may have no interest in or understanding of private lending is a recipe for frustration, conflict, and lost value.

This guide provides key tips for incorporating promissory notes into your Texas estate plan. Whether you decide to hold the note and plan for its transfer, sell it during your lifetime to simplify the estate, or use one of several other strategies, you will understand the options and the implications of each approach.

Why Promissory Notes Complicate Estate Planning

To plan effectively, you first need to understand why notes create challenges that other assets do not.

They Require Active Management

A promissory note is not a set-it-and-forget-it asset. Someone needs to track payments, follow up on late payments, maintain records, verify that property taxes and insurance are current, and deal with any issues that arise with the borrower or the property. If you pass away while holding a note, your heirs inherit these responsibilities whether they want them or not. An heir who lives in another state, has no experience with real estate or lending, and is dealing with the grief of losing a loved one is poorly positioned to manage a private note effectively.

They Are Difficult to Divide

If your estate plan calls for equal distribution among multiple heirs, a promissory note creates an immediate problem. You cannot split a note the way you split a bank account. Options include leaving the note to one heir and offsetting with other assets to the others, having all heirs share ownership of the note jointly, or selling the note and distributing the cash. Each option has drawbacks. The first requires sufficient other assets to provide equal treatment. The second creates a situation where multiple people must agree on every decision related to the note — a frequent source of family conflict. The third requires executing a sale, which takes time and reduces the value through the discount.

They Carry Ongoing Risk

A note that is performing beautifully during your lifetime could default after your death. The borrower might stop paying because they had a personal relationship with you that does not extend to your heirs. The property might lose value due to market changes. Your heirs might not have the knowledge or resources to deal with a default, potentially losing significant value. These risks persist as long as the note exists, and they become harder to manage in the hands of inexperienced heirs.

They Have Complex Tax Implications

The tax treatment of inherited notes can be complex, involving stepped-up basis calculations, installment sale rules, income in respect of a decedent provisions, and estate tax considerations. Heirs who are unfamiliar with these rules may make costly mistakes — either overpaying taxes or failing to file correctly. For a general overview of how note sales are taxed, see this resource on tax implications of selling a note in Texas.

Tip 1: Inventory and Document Your Notes Thoroughly

The most basic step in estate planning for promissory notes is making sure your heirs can find and understand them. This sounds obvious, but it is remarkably common for note holders to pass away without leaving clear documentation of their notes, leaving heirs to piece things together from scattered files, county records, and confused borrowers.

Create a Note Inventory

Prepare a document that lists every note you hold with the following information for each: the borrower's name and contact information, the original principal amount and current remaining balance, the interest rate and monthly payment amount, the maturity date and number of remaining payments, the property address and type, where the original promissory note is stored, where the recorded deed of trust can be found, and the current status of the note including payment history and any issues.

Organize the Physical Documents

Store the original promissory note, copies of the recorded deed of trust, the complete payment history, and all related correspondence in a clearly labeled file. Tell your executor, trustee, or a trusted family member where these documents are located. If the original note is in a safe deposit box, make sure someone else has access. Missing documents do not make a note worthless, but they significantly complicate the administration of the estate and the eventual sale or transfer of the note.

Include the Note in Your Estate Planning Documents

Make sure your will, trust, or other estate planning documents specifically reference your promissory notes and provide clear instructions for how they should be handled. Vague language like "all my personal property" technically covers notes, but specific identification and instructions prevent confusion and potential disputes among heirs.

Tip 2: Consider Selling the Note During Your Lifetime

For many note holders, the simplest and most effective estate planning strategy is to sell the note while they are alive and convert it to cash or invested assets that are easier to manage and divide.

The Case for Selling Now

Selling your note during your lifetime eliminates every single complication discussed above. There is no note for your heirs to manage. There is no illiquid asset to divide. There is no ongoing borrower risk. There is no complex tax treatment of inherited installment obligations. Instead, your estate contains cash or invested assets that can be distributed cleanly and efficiently according to your wishes.

The "cost" of this simplification is the discount you take when selling the note. But that discount should be weighed against the risks, complications, and potential losses your heirs would face if they inherited the note. A 15 to 25 percent discount on a performing note is often a very reasonable price to pay for the certainty and simplicity of converting it to cash. For more on how discounts work, see this explanation of discounts when selling a note in Texas.

What to Do With the Proceeds

Once you sell the note, the proceeds can be invested in a diversified portfolio that is easier to manage and divide, placed in a trust that provides income to you during your lifetime and distributes to heirs upon your death, used to fund life insurance that provides a tax-free death benefit to your heirs, applied to pay off debts or simplify your financial picture, or simply held in a bank account as liquid assets ready for distribution.

How to Get Started

Contact a reputable note buyer to get a cash offer. Longhorn Note Buyers provides offers within 24 hours and can close in two to four weeks. Use the offer to evaluate whether selling makes sense in the context of your overall estate plan. Discuss the option with your estate planning attorney and financial advisor before making a final decision. For a walkthrough of what to expect, see this guide on selling a note step by step in Texas.

Tip 3: If You Hold the Note, Plan for the Transfer

If you decide to keep the note rather than selling it, take specific steps to ensure a smooth transfer to your heirs.

Name a Specific Beneficiary or Heir

Designate a specific person to receive the note rather than leaving it to be divided among multiple heirs. The designated person should ideally be someone who is financially savvy, organized, and willing to manage the note or sell it after your death. If no single heir fits this description, consider naming your executor or trustee with instructions to sell the note and distribute the proceeds.

Provide Management Instructions

Leave written instructions for your heir or executor that explain how to manage the note — how to collect payments, how to track records, how to handle late payments, and when to consider selling. Include the borrower's contact information, the payment schedule, and any relevant history. These instructions can save your heir weeks of confusion and prevent costly mistakes.

Include a Power of Attorney Provision

If you become incapacitated before you pass away, someone needs the authority to manage your notes on your behalf. Make sure your durable power of attorney specifically authorizes the agent to manage, sell, or foreclose on promissory notes and real estate interests. A general power of attorney may cover this, but specific language eliminates ambiguity.

Consider a Living Trust

Placing your promissory notes in a revocable living trust is one of the most effective estate planning strategies for note holders. A trust avoids probate, which means the successor trustee can begin managing or selling the notes immediately upon your death or incapacity without waiting for court approval. The trust document can include specific instructions for handling the notes, and the transfer to the trust during your lifetime does not trigger tax consequences or affect the note's terms.

Tip 4: Understand the Tax Treatment of Inherited Notes

The tax implications of inheriting a note are different from — and generally more favorable than — the tax implications of selling a note during your lifetime. Understanding these rules helps you make informed decisions about whether to sell now or let your heirs inherit.

Stepped-Up Basis

When your heirs inherit a promissory note, their tax basis in the note is "stepped up" to its fair market value at the date of your death. This stepped-up basis can significantly reduce or eliminate the capital gains tax that would be owed if the note is later sold. For notes that were created through installment sales with large deferred gains, the stepped-up basis can represent substantial tax savings for your heirs.

Income in Respect of a Decedent

The interest component of note payments received by your heirs after your death is considered income in respect of a decedent and is taxed as ordinary income to the heirs. This is the same treatment the interest would have received if you had continued to collect the payments. Your heirs should be aware that the monthly payments they receive include a taxable interest component and plan accordingly.

Estate Tax Considerations

The fair market value of your promissory notes is included in your gross estate for federal estate tax purposes. For 2026, the federal estate tax exemption is substantial, so most estates will not owe estate tax. However, if your total estate including notes exceeds the exemption amount, the notes contribute to the taxable estate. Selling notes during your lifetime reduces the size of your gross estate, though the cash proceeds are still part of the estate unless spent or gifted before death.

Work With a Tax Professional

The interaction of installment sale rules, stepped-up basis, income in respect of a decedent, and estate tax can be complex. Work with a CPA or tax attorney who understands these rules to ensure your estate plan optimizes the tax treatment for both you and your heirs.

Tip 5: Address Non-Performing Notes Before They Become Problems

If any of your notes are in default or at risk of default, address them now rather than leaving your heirs to deal with the situation. Your heirs are unlikely to have the knowledge, resources, or inclination to pursue foreclosure, negotiate workouts, or manage the legal complexities of a defaulted note.

Sell Non-Performing Notes Now

Even in default, your note has value. Professional note buyers purchase non-performing notes regularly and have the expertise and legal infrastructure to resolve defaults. Selling a non-performing note during your lifetime converts a problematic asset into clean cash and spares your heirs the headache of dealing with it. For more on this option, see this guide on selling non-performing notes in Texas.

Resolve Defaults Before They Escalate

If a borrower is behind but the situation is salvageable, take action now. Negotiate a workout, pursue foreclosure, or sell the note. Any of these resolutions is better than passing a defaulted note to heirs who may not know what to do with it and may lose significant value through inaction or mismanagement.

Tip 6: Communicate With Your Heirs

One of the most valuable things you can do is have a conversation with your heirs about the notes you hold. Many heirs are completely unaware that promissory notes exist in the estate until they start going through the deceased's papers. By then, payments may have been missed, records may be incomplete, and the borrower may have assumed the note was forgiven or forgotten.

What to Communicate

Tell your heirs that you hold one or more promissory notes as part of your assets. Explain in general terms what the notes are, what they are worth, and what options the heirs will have — including selling them. Let them know where the documents are stored and who to contact for help. If you have a preferred approach — sell the note, keep it, or some other strategy — share that preference so your heirs can honor it.

Introduce Key Contacts

Make sure your heirs know who your estate planning attorney, tax advisor, and preferred note buyer are. If you have worked with Longhorn Note Buyers or another reputable buyer, share that contact information. Having a trusted buyer already identified saves your heirs the time and stress of finding one on their own during an already difficult period.

Tip 7: Review and Update Your Plan Regularly

Estate plans are not static documents. As the terms of your notes change — balances decrease, borrowers pay off, new notes are created, defaults occur — your estate plan should be updated to reflect the current reality. Review the note-related provisions of your estate plan at least annually and after any significant change in your note portfolio.

Pay particular attention to notes that are approaching payoff, as these may no longer need special estate planning treatment. Also watch for notes where the borrower's payment behavior has changed, as a note that was performing well when you created your estate plan may be in trouble by the time you need the plan to work.

Why Longhorn Note Buyers for Estate Planning Purposes

Whether you decide to sell your notes now to simplify your estate or your heirs need to sell after your passing, Longhorn Note Buyers is a trusted partner for the transaction. With over $47 million in notes purchased across Texas, an A+ BBB rating, a 100 percent close rate, and founder Nick McFadin's experience dating back to 1983, Longhorn provides the expertise, reliability, and sensitivity that estate-related note transactions demand.

Their 24-hour offer turnaround gives you or your executor a concrete valuation for planning purposes, and their two-to-four-week closing timeline means the note can be resolved efficiently. They have extensive experience working with executors, trustees, and heirs, and they understand the unique considerations that apply when a note sale is part of an estate settlement.

Ready to Sell Your Note?

If you hold a promissory note in Texas and you want to simplify your estate plan, the first step is knowing what your note is worth today. Contact Longhorn Note Buyers at (210) 828-3573 or visit longhornnotebuyers.com to get your free, no-obligation cash offer within 24 hours. Use the information to make the best decision for you and the people you care about.

Frequently Asked Questions

Should I sell my note now or let my heirs inherit it?

It depends on your specific situation. Selling now simplifies your estate, eliminates ongoing risk, and converts the note to liquid assets that are easier to divide. Letting heirs inherit preserves the income stream and may provide tax advantages through the stepped-up basis. The best choice depends on your heirs' ability and willingness to manage the note, the complexity of dividing it among multiple beneficiaries, your current cash needs, and the tax implications in both scenarios. Discuss both options with your estate planning attorney.

Can I put a promissory note into a living trust?

Yes, and it is often recommended. Transferring a note into a revocable living trust avoids probate, provides for seamless management if you become incapacitated, and allows the successor trustee to sell or manage the note immediately upon your death without court involvement. The transfer to the trust during your lifetime does not trigger tax consequences or affect the borrower's obligations.

How is the value of a note determined for estate tax purposes?

The IRS requires that promissory notes be valued at their fair market value as of the date of death, not their face value. Fair market value considers the note's remaining balance, interest rate, payment history, borrower quality, property value, and other factors. An appraisal or a professional note buyer's offer can be used to establish the fair market value for estate tax purposes.

What happens if my executor does not know how to handle a promissory note?

This is why documentation and communication are so important. If your executor is unfamiliar with notes, they will need guidance — either from instructions you have left, from your estate planning attorney, or from a professional note buyer who can explain the options. In most cases, the executor's best course of action is to sell the note to a professional buyer, distribute the cash to the heirs, and move on. This is the simplest path that requires the least specialized knowledge.

Can I gift a portion of my note to heirs during my lifetime?

Yes, you can gift a partial interest in a promissory note. However, this creates complications including shared ownership, potential gift tax implications, and the need for all owners to agree on management decisions. In most cases, it is simpler to either sell the note and gift the cash or hold the note and let it pass through your estate plan upon your death. Consult with your estate planning attorney and tax advisor before gifting note interests.