Imagine spending your life building wealth, in real estate, stocks, or your, with the hope of leaving a legacy for your children.
However, Then one day, you find yourself wondering: Will the government take a massive chunk of it anyway (this bears monitoring), in today's financial world.
If your estate is well above the federal estate tax exemption threshold — $30 million for a married couple in 2026 under the OBBBA — you might be asking a very legitimate question: “What’s the point of the step-up in basis if my estate still owes millions in estate taxes.
Moreover, ” Conversely, if your estate is well below the federal estate tax exemption threshold, you might also ask the far more common question: “What's the benefit of the step-up in basis if I won't be paying the death tax anyway.
Furthermore, ” Because I'm not dead yet, I haven't been focused too much on the estate tax owed upon death.
However, any good pre-mortem planner who thinks in two timelines, it's important to clarify the confusion and plan accordingly. Let’s walk through how it all actually works.
In contrast, I’ll explain it with three examples, so you’ll come away understanding why the step-up in basis still matters and why estate tax planning becomes critical the wealthier you get.
The Basics: Step-Up in Basis vs Estate Tax The key to understanding how the step-up in basis helps, regardless of your estate's value is knowing there are two completely different taxes in play when someone dies: 1.
Estate Tax – a tax on the total value of your assets at death, if your estate exceeds the federal exemption. However, This tax is paid by the estate.
On the other hand, Capital Gains Tax – a tax on the appreciation of assets, but only if those assets are sold. This tax is paid by your heirs.
When someone dies, their heirs get a step-up in cost basis on inherited assets, in today's financial world.
That means the asset’s cost basis is reset to the fair market value (FMV) on the date of death. Furthermore, Conversely, The capital gains from the decedent’s lifetime are essentially wiped out.
If you’re looking for a financial reason to hold onto your stocks, real estate, and other assets indefinitely, the step-up in cost basis is a compelling one.
Instead of selling your assets, do what billionaires do, and borrow against them to incur no capital gains tax liability.
However, I used to think it was wasteful for investors to never sell and enjoy a better life with the ceeds along the way.
On the other hand, But it turns out, never selling might be the greatest gift you could leave your adult children.
Step-up In Basis vs Estate Tax Example 1: A $50 Million House To help us better understand how the step-up in basis and the estate tax threshold works, I want to use an extreme example.
Thinking in extremes helps you understand anything better. Nevertheless, Let’s say you and your spouse own a single house worth $50 million.
You bought it decades ago for $1 million, and it’s now your primary residence (this bears monitoring) (this bears monitoring). Nevertheless, You both pass away, and your two children inherit the perty.
Capital Gains Tax: Normally, if your children sold that house with a $49 million gain, they’d owe capital gains tax — around 20% federal plus 3 (this bears monitoring). 8% net investment income tax.
Nevertheless, That’s over $11 million in taxes. However, But because of the step-up in basis, the cost basis resets to $50 million (something worth watching).
If they sell the house for $50 million the day after your death, they owe zero capital gains tax, given the current landscape.
Hooray for a tax-free generational wealth transfer—just for having the good fortune of being born to a rich bank of mom and dad. Well, not quite, amid market uncertainty.
Estate Tax: Despite being dead, you’re not off the hook entirely.
Because your estate is worth $50 million (you have no other assets but the $50 million house) and the federal estate tax exemption for a married couple is $27 (something worth watching), given the current landscape.
98 million in 2025, the taxable estate is $22. 02 million. At a 40% tax rate, that’s a $8. Moreover, 8 million estate tax bill.
However, Nevertheless, And here’s the key point: the estate tax comes first. It has to be paid before the heirs get the perty — and it’s paid out of the estate itself, in today's market environment.
So the executor (perhaps your children) either: Have to sell part or all of the house to pay the estate tax, or Use other liquid assets in the estate (if any) or borrow against the house Borrow Against the perty (Estate Takes Out a Loan) Use Life Insurance (Irrevocable life insurance trusts) File a 6-month extension with the IRS and ask to pay in installments If you know you have a large, illiquid estate, you must plan ahead to figure out how to pay the estate tax (quite telling).
So What’s the Point of the Step-Up. At first glance, this seems discouraging (remarkable data). You still owe tax, so what did the step-up even you.
In contrast, Here’s the thing: Without the step-up, the tax bill is much worse. Imagine the same scenario, but there was no step-up in basis.
However, The kids inherit your $50M house with a $1M cost basis (fascinating analysis). Now the total taxes owed are: • Estate tax: $8.
Furthermore, 8 million • Capital gains tax (if they sell): 23, considering recent developments. 8% of $49 million = ~$11. Meanwhile, 7 million Total tax: $20.
However, 5 million That’s 40% of the value of the estate gone to the government. With the step-up in basis, that total tax burden drops to just the $8. 8 million estate tax from $20.
In other words, the step-up in cost basis prevents double taxation. Moreover, It doesn’t make estate tax go away.
Moreover, On the other hand, But it shields your heirs from also having to pay capital gains tax on the same appreciated value.
Step-up In Basis vs Estate Tax Example 2: A $45 Million Stock Portfolio Let’s say your net worth is mostly tied up in stocks you bought in the early 2000s (something worth watching).
Maybe you got into Amazon at $50 a or invested early in a basket of private AI companies, in today's market environment.
Now, your portfolio is worth $45 million, but your cost basis is only $2 million, given current economic conditions.
Nevertheless, Nevertheless, When you pass away: Your heirs receive the stock with a stepped-up basis of $45 million If they sell immediately, they owe no capital gains tax However, if your total estate (including other assets) exceeds the federal exemption, they’ll still face estate tax on the amount over the threshold Let’s say your total estate is worth $45 million and you're married (quite telling).
Furthermore, Assuming you’ve perly elected portability and the combined federal estate tax exemption at the time of death is $25 million, your taxable estate would be $20 million.
Nevertheless, At a 40% estate tax rate, the estate would owe apximately $8 million, in today's market environment.
Additionally, This tax must be paid before distributions to your heirs, meaning they would receive roughly $37 million, not the full $45 million.
Nevertheless, However, The good news is that the step-up in cost basis applies to the full $45 million, not just the $37 million your heirs actually receive after taxes (noteworthy indeed), in this volatile climate.
So if they sell the assets for $45 million, they’ll owe zero capital gains tax because their cost basis has been reset to the fair market value at the time of death, given current economic conditions.
Without the step-up, they would inherit your original cost basis of $2 million.
Additionally, If they sold the portfolio for $45 million, they’d owe capital gains tax on $43 million in unrealized gains.
Additionally, 8% federal long-term capital gains rate, that’s over $10 million in potential tax — on top of the $8 million in estate tax.
Step-Up in Basis Example 3: A $4 Million Rental perty Let’s say you bought a rental perty 30 years ago for $400,000. Over time, its value has appreciated to $4 million, and it’s now fully paid off.
Additionally, Meanwhile, You have no mortgage, and your total estate—including this perty, some retirement savings, and other assets—is worth $5 million.
Since the federal estate tax exemption for an individual is $13. 99 million in 2025 (or $27. 98 million for a married couple), your estate is well below the taxable threshold (fascinating analysis).
That means no estate tax is due—your heirs get everything without the estate owing a penny to the IRS, given current economic conditions.
But here’s where the step-up in basis makes a massive difference: Capital Gains Tax Without the Step-Up: If you gifted the perty to your child while a, they’d inherit your original $400,000 basis, not the $4 million fair market value.
Meanwhile, If they later sold it for $4 million, they’d owe capital gains tax on $3. 6 million of gains, in light of current trends.
Conversely, That's ly over $850,000 in taxes, depending on their income and state.
On the other hand, if you hold the perty until your death, then your heirs get a step-up in basis to the fair market value on your date of death — in this case, $4 million.
If they sell right away, no capital gains tax is due. So ironically, doing nothing and holding onto the perty until death is often the most tax-efficient strategy.
So perhaps your boomer parents aren't so greedy after all for not helping you more while a.
Additionally, Capital Gains Tax With the Step-Up: But if you hold the perty until death, the basis is stepped up to the $4 million fair market value (something worth watching).
Your heirs can then sell it for $4 million the day after inheriting it and owe zero capital gains tax, considering recent developments. Who Pays What Tax.
Estate tax is paid by the estate, if owed, before assets are distributed.
On the other hand, Capital gains tax is only paid by the heirs if they sell the asset and only if there’s a gain beyond the stepped-up basis, in light of current trends.
In this third example, because the estate is below the exemption limit and your heirs sell right after inheriting, neither the estate nor the heirs pay any tax.
Hooray for not being rich enough to pay even more taxes.
The Step-Up Is A Gift — But It’s Not a Shield Think of the step-up in basis as a forgiveness of capital gains tax, but not a full pardon from all taxes.
Furthermore, Moreover, You’re still subject to the estate tax if your assets exceed the exemption (this bears monitoring).
On the other hand, On the other hand, But the step-up can make a huge difference in the after-tax inheritance your children receive.
Furthermore, For high-net-worth families, the step-up is essential to prevent what could otherwise become a 60%+ combined tax burden.
Meanwhile, Even if you don’t expect your estate to be large enough to trigger estate tax, the step-up in basis can still your heirs hundreds of thousands to millions of dollars in capital gains taxes.
Moreover, The step-up is one of the most powerful estate planning tools available — and a compelling reason to hold onto appreciated assets until death, especially if your goal is to maximize what you pass on, considering recent developments.
Actions You Can Take To Reduce Your Estate Tax If your estate is well above the federal exemption — especially if most of your wealth is tied up in a single asset a, perty, or concentrated stock position — you need to plan ahead to pay the estate taxes.
Some strategies include: 1.
Grantor Retained Annuity Trust (GRAT) Move appreciating assets out of your estate into trusts, a Grantor Retained Annuity Trust (GRAT) or Intentionally Defective Grantor Trust (IDGT), in today's financial world.
These remove future appreciation from your taxable estate, amid market uncertainty. Example: Put $1M of rapidly appreciating assets ( stocks or real estate) into a short-term, 2-year GRAT.
You get annuity payments back, and the future appreciation passes to heirs gift-tax free (which is quite significant).
Transfer $2M into a 2-year GRAT Receive $1M/year back in annuities Asset appreciates 8% annually After 2 years, excess growth goes to heirs estate-tax free A Revocable Living Trust Doesn't Reduce Your Taxes For those wondering whether putting your assets in a revocable living trust can help you on estate taxes or capital gains taxes — it doesn’t, given the current landscape.
A revocable living trust is primarily a tool for avoiding bate, maintaining privacy, and lining the distribution of your assets after death.
Nevertheless, While it does ensure your heirs receive the step-up in basis on appreciated assets (since the trust is still considered part of your estate), it does not reduce your estate’s value for estate tax purposes.
The IRS treats assets in a revocable trust as if you still own them outright. In other words, the trust helps with logistics and efficiency — not with reducing your tax bill.
Additionally, Moreover, If your goal is to lower your estate taxes, you'll need to explore other strategies, such as lifetime gifting, irrevocable trusts, or charitable giving, which actually remove assets from your taxable estate.
Annual Gifting You and your spouse can give up to $19,000 (2025) per person, per year to anyone without reducing your lifetime exemption.
The data indicates that annual gift limit tends to go up every year to account for inflation. In contrast, Example: you and your spouse have 2 children and 4 grandchildren.
That’s 6 people × $19,000 × 2 spouses = $228,000/year. On the other hand, Over 10 years: $228,000 × 10 = $2.
28 million removed from your estate These gifts also shift appreciation out of your estate, compounding the benefit If your estate is well below the estate tax exemption amount, annual gifting won't make a difference for estate tax reduction purposes.
You've just decided to help your children or others now, rather than after you're dead, amid market uncertainty.
Moreover, Furthermore, Further, you're free to give more than the gift tax limit a year if you wish. Nically, you're supposed to file Form 709 if you do (something worth watching).
On the other hand, In contrast, However, I don't think it matters if you're way below the estate tax threshold.
Charitable Giving Donating part of your estate to a charity can reduce your taxable estate and support causes you care.
Charitable remainder trusts can vide income for you and a benefit for your heirs, while reducing the tax burden.
Example: You set up a Donor Advised Fund and donate $100,000 a year to your children's private school for 10 years, in this volatile climate.
Not only do you help your school, you reduce your taxable estate by $1,000,000 and get a board seat.
In turn, your children get a leg up in getting into the best high school and colleges, in today's financial world.
Buy Life Insurance in an ILIT Life insurance held inside an Irrevocable Life Insurance Trust (ILIT) can vide your heirs with liquidity to pay estate taxes — without the ceeds being taxed as part of your estate.
Furthermore, Example: Buy a $3 million life insurance policy inside an ILIT. On the other hand, The trust owns the policy and receives the payout tax-free when you die.
That $3 million death benefit can be used by your heirs to pay estate taxes, so they don’t have to sell assets (noteworthy indeed). : vides tax-free liquidity.
Nevertheless, Con: You must give up control of the policy (but can fund premiums via gifting). Charitable Remainder Trust (CRT) Place appreciated assets into a CRT.
You receive income for life, and when you die, the remainder goes to charity. You get a partial estate tax deduction now.
Example: Donate $5M appreciated stock You receive $200K/year income Get a charitable deduction today (~$1.
5–2M) Avoid capital gains on sale of stock inside the trust Reduces taxable estate by $5M : Gives you income, avoids capital gains, helps charity Con: Your heirs don’t receive the donated asset 6, given current economic conditions.
Family Limited Partnership (FLP) Put assets into an FLP and gift minority interests to family members, given current economic conditions.
Because these interests lack control and marketability, the IRS allows you to discount their value by 20–35%.
Example: Move $20M into an FLP Gift 40% interest to heirs With a 30% discount, value is reported as $5, in this volatile climate.
Meanwhile, 6M, not $8M Reduces reported estate value significantly : Keeps control while reducing taxable estate Con: IRS scrutinizes discounts — must be done carefully 7.
Relocate To A Lower Tax State Or Country Finally, you may want to consider relocating to a state with no state estate or inheritance tax before you die.
There are over 30 such states, in today's market environment. If you can successfully establish residency, your estate—and ultimately your heirs—could millions of dollars in taxes.
Now, if you’re a multi-millionaire thinking moving to another country to.