Curated by: Rubric Advisors
Estate & Legacy
Step-Up in Basis
When assets pass at death, heirs often receive a stepped-up cost basis that eliminates unrealized capital gains. Understand how this works and its role in estate and tax planning.
Step-Up in Basis
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What Step-Up in Basis Means
- Cost basis of inherited assets resets to fair market value at the date of death
- This eliminates all unrealized capital gains that accrued during the owner's life
- Heirs who sell immediately may owe little or no capital gains tax
- The step-up applies automatically, no special election is required
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What Step-Up in Basis Means
- Cost basis of inherited assets resets to fair market value at the date of death
- This eliminates all unrealized capital gains that accrued during the owner's life
- Heirs who sell immediately may owe little or no capital gains tax
- The step-up applies automatically, no special election is required
How Unrealized Gains Disappear
- Stock purchased at $10 and worth $100 at death gets a new basis of $100
- If the heir sells at $100, the taxable gain is zero rather than $90
- Decades of appreciation can be eliminated in a single generational transfer
- This benefit can be worth more than many other estate planning strategies
Community Property Double Step-Up
- In community property states, both halves of jointly held assets get stepped up
- The surviving spouse receives a full basis reset on the entire asset
- Common-law states only step up the decedent's share of jointly owned property
- This distinction can create significant tax differences depending on state of residence
Assets That Qualify and Those That Do Not
- Stocks, bonds, mutual funds, ETFs, and real estate in taxable accounts qualify
- Closely held business interests, collectibles, and precious metals also qualify
- Traditional IRAs and 401(k)s are taxed as ordinary income, no step-up applies
- Assets gifted during life keep the donor's original cost basis instead
Holding vs Gifting Appreciated Assets
- Gifting during life carries over the donor's low basis to the recipient
- Holding appreciated assets until death allows heirs to benefit from the step-up
- Gifting may still make sense if the asset is expected to appreciate much further
- The decision depends on comparing gift tax savings against lost step-up benefits
Interaction With the Lifetime Exemption
- Assets included in the taxable estate can still receive the step-up in basis
- Estates below the exemption threshold get both tax-free transfer and stepped-up basis
- Larger estates may face estate tax but heirs still benefit from the new basis
- Using the lifetime exemption does not prevent the basis step-up from applying
Legislative Risk and Planning Considerations
- Congress has periodically proposed limiting or eliminating the step-up benefit
- A $2M home purchased at $200K saves heirs roughly $270K in federal capital gains tax
- Identify which assets in your portfolio have the largest unrealized gains
- Document original cost basis carefully so heirs can establish the stepped-up value
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