You bought IBM stock for $25 a share 30 years ago, and it's now worth $250. Your rental property cost $75,000 in 1992 and is valued at $340,000 today. These gains represent decades of smart investing, but they also create a tax burden that could cost your heirs thousands of dollars.
An experienced Texarkana Estate Planning Lawyer can help you transfer these appreciated assets without triggering unnecessary capital gains taxes. Texas and Arkansas residents face different state-level tax considerations. The key to protecting your family's wealth is implementing strategies before you need them.
Federal Capital Gains Tax Basics
Federal tax law treats capital gains differently based on how long you've owned an asset. Short-term capital gains on assets held for less than one year face ordinary income tax rates up to 37%. Long-term capital gains receive preferential treatment, with rates of 0%, 15%, or 20% based on your total income.
Taxpayers under certain income thresholds pay 0% long-term capital gains tax, while higher earners face the 15% or 20% rates. For 2025, these thresholds create Estate Planning opportunities for strategic asset transfers and income timing.
State Capital Gains Taxes in Texas and Arkansas
Texas imposes no personal state income tax, so residents avoid state-level capital gains entirely.
Arkansas taxes capital gains as ordinary income at rates up to 3.9% for 2025, with a 50% exclusion for net capital gains. After the 50% exclusion, the effective top rate on net long-term capital gains is 1.95%. For extraordinary transactions, Arkansas exempts 100% of net capital gains exceeding $10 million, though this applies to very few taxpayers.
The Step-Up in Basis Advantage
One of the most powerful wealth transfer strategies involves the step-up in basis rules under Internal Revenue Code Section 1014. When you inherit property, its tax basis "steps up" to the fair market value on the date of the original owner's death, eliminating built-in capital gains tax.
Consider the fictional Miller family from Texarkana. Frank Miller bought Arkansas farmland for $100,000 in 1980. When Frank died in 2025 with the land valued at $800,000, his daughter Sarah inherited it with a stepped-up basis of $800,000. If Sarah immediately sells for $800,000, she pays zero capital gains tax despite the $700,000 appreciation during her father's ownership.
This step-up benefit applies to most inherited assets, including stocks, bonds, real estate, and business interests. However, certain assets like retirement accounts and annuities don't qualify for stepped-up basis treatment.
Strategic Asset Transfer Methods to Avoid Capital Gains Tax
Tax-efficient Estate Planning requires careful timing and proper legal structures to maximize benefits for your heirs while minimizing tax burdens.
Lifetime Gifts vs. Inherited Assets
The choice between making lifetime gifts or letting assets pass through your estate dramatically affects your heirs' tax burden. Making lifetime gifts can reduce estate taxes, but it doesn't provide the step-up in basis benefit that inherited assets receive.
This analysis becomes more nuanced for Arkansas residents due to the state's 50% capital gains exclusion. The gift versus inheritance decision must account for both federal and state tax implications, along with estate tax considerations for larger estates.
Annual Exclusion Strategies
The federal gift tax annual exclusion allows you to transfer $19,000 per recipient in 2025 without using your lifetime exemption. Married couples can combine their exclusions to gift $38,000 per recipient each year. Smart planners use these exclusions to gradually transfer appreciating assets over multiple years without triggering gift tax consequences.
A Magnolia couple could transfer shares in their family business worth the maximum annual exclusion amount each year to their three children. Over ten years, they will have moved over $1 million in business value out of their estate while the remaining shares continued appreciating.
Grantor Trusts and Tax Benefits
With intentionally defective grantor trusts (IDGTs), you transfer appreciated assets to an irrevocable trust but continue paying income taxes on the trust's earnings. The grantor's payment of the trust's income taxes allows trust assets to grow without that tax drag, effectively moving more wealth out of the taxable estate.
Grantor trust status creates several Estate Planning advantages. The trust can accumulate income without current taxation to the beneficiaries, and transactions between the grantor and trust don't trigger recognition events. This allows for sophisticated restructuring and refinancing without immediate tax consequences.
Charitable Strategies for Tax Reduction
Charitable remainder trusts (CRTs) allow you to transfer highly appreciated assets to charity while retaining income for life and receiving significant tax benefits. The trust can sell your appreciated property without immediate capital gains tax, though distributions to the income beneficiary are taxable income under the trust's tier system.
Charitable lead trusts provide another option for families with charitable inclinations and substantial estate tax exposure. These trusts make payments to charity for a specified term, then transfer remaining assets to family members at reduced gift tax values.
Qualified Small Business Stock Benefits
Internal Revenue Code Section 1202 provides extraordinary benefits for qualified small business stock (QSBS). Under current law, shareholders can exclude up to $10 million in capital gains when selling QSBS held for at least five years, subject to strict requirements including C-corporation status, gross assets under $50 million at issuance, and active business operations.
New legislation effective for stock issued after July 4, 2025, increases the exclusion to $15 million and modifies certain qualification rules.
Suppose Dr. Amanda Chen from Marshall, Texas invested $200,000 in a qualifying C corporation startup in 2018. When she sells her shares in 2025 for $5 million, she can exclude the entire $4.8 million gain from federal taxation under Section 1202. However, QSBS qualification requires careful documentation and ongoing compliance with numerous requirements, including the active business test and asset limitations.
Installment Sales and Deferred Recognition
Installment sale treatment under Internal Revenue Code Section 453 allows you to spread capital gains recognition over multiple years, potentially keeping you in lower tax brackets. This strategy works particularly well for family transactions involving business interests or real estate.
The fictional Williams family structured their trucking company sale to avoid a large capital gains hit. Instead of receiving $4 million in cash, they accepted a 10-year installment note from the buyer. This spreads the $2.5 million capital gain over ten years, keeping them in the 15% capital gains bracket instead of the 20% rate they would face with a lump-sum payment.
Arkansas residents benefit particularly from installment treatment because it helps manage the state-level tax burden alongside the federal obligations. The 50% exclusion applies each year as gains are recognized, providing ongoing state tax relief throughout the installment period.
State-Specific Considerations to Keep in Mind
The tax differences between Texas and Arkansas create distinct planning opportunities and challenges for residents of each state.
Texas Community Property Rules
Texas community property laws provide unique planning opportunities for married couples. Property acquired during marriage generally receives a full step-up in basis for both spouses when the first spouse dies, unlike common law states, where only the deceased spouse's half receives stepped-up basis.
Texas homestead laws also provide strong, value-uncapped protection from most judgment creditors, subject to constitutional exceptions for purchase-money liens, taxes, certain improvements, and other specific claims. This protection makes home ownership particularly attractive for wealth preservation strategies.
Arkansas Property and Tax Considerations
Arkansas provides various mechanisms for agricultural land preservation and family business continuity through conservation easements and local land trust programs. These tools can help families reduce estate values for tax purposes while preserving family heritage and agricultural operations.
The state's 50% capital gains exclusion creates opportunities for strategic timing of asset sales. Families might accelerate some gains in low-income years or defer others when facing higher ordinary income rates. Arkansas residents should also consider the interaction between state and federal tax brackets when implementing multi-year gain recognition strategies.
Advanced Planning Techniques for Tax-Efficient Transfers
Sophisticated wealth transfer strategies require careful coordination between tax planning and Estate Planning goals. These techniques can provide significant benefits for families with substantial appreciated assets.
Family Limited Partnerships
Family limited partnerships (FLPs) let parents move appreciating assets to their kids while keeping control of the business or investments. When you set up the partnership structure correctly, you can often get valuation discounts for gift tax purposes because the younger generation receives limited partnership interests rather than direct ownership.
The income and capital gains get allocated based on ownership percentages, so some of the tax burden shifts to children who might be in lower tax brackets.
Grantor Retained Annuity Trusts
Grantor retained annuity trusts (GRATs) work particularly well with volatile or rapidly appreciating assets. You transfer property to an irrevocable trust while retaining the right to receive annuity payments for a specified term. If assets appreciate above the IRS-assumed rate, excess growth passes to beneficiaries gift-tax-free. Zero-out GRATs can be structured to minimize gift tax exposure while maximizing wealth transfer potential.
Strategy Implementation and Professional Guidance
You can't just pick one strategy and hope for the best when it comes to capital gains planning. Federal tax rules, state laws, Estate Planning goals, and your family's specific circumstances all affect which approaches make sense for your situation.
Regular review and adjustment help maintain effectiveness as circumstances change. Tax law modifications, family situations, and market conditions all influence the optimal approach for your specific needs. What works well for one family may not be appropriate for another, even with similar asset levels and family structures.
Don't let preventable capital gains taxes erode your family's wealth. At Ross & Shoalmire, P.L.L.C., our Estate Planning team has decades of experience helping families in Texas and Arkansas minimize tax burdens while achieving their wealth transfer goals.
