Step-Up in Basis and Estate Planning: A Smart Strategy for Tax-Efficient Wealth Transfer

Introduction: The Inheritance Rule That Could Save Your Family Thousands

Most people think estate planning is only about who gets what. But smart estate planning isn’t just about passing down wealth—it’s about passing it down tax-efficiently.

One of the most powerful tools to accomplish this is the step-up in basis.

Used correctly, a step-up in basis can eliminate years—or even decades—of unrealized capital gains taxes. It allows your heirs to inherit assets like real estate, stocks, or a family business with a new tax basis, wiping out built-in gains and creating a cleaner, more profitable transfer.

This blog breaks down how the step-up in basis works, why it matters, and how to incorporate it into your estate strategy—especially if you own appreciating assets or want to preserve wealth across generations.

For broader strategies around inheritance planning, check out our blog on Trusts for Legal Asset Protection and Tax-Efficient Inheritance.

What Is a Step-Up in Basis?

When you purchase an asset—like a rental property, stocks, or a business—your basis is typically the amount you paid for it. Over time, that asset appreciates. If you sell it during your lifetime, you owe capital gains tax on the difference between the sale price and your basis.

But when someone inherits an asset, the tax rules change.

Instead of inheriting the original basis, the recipient gets a stepped-up basis—meaning the asset is revalued to its fair market value at the time of death.

Example: Step-Up in Basis in Action

• You bought a property for $200,000 in 1995

• By the time you pass away, it’s worth $800,000

• Without a step-up, your heirs would owe capital gains tax on $600,000 if they sold it

• With a step-up, their new basis is $800,000—if they sell it immediately, they owe $0 in capital gains

This one provision can save your family hundreds of thousands in tax—legally and efficiently.

Assets That Qualify for a Step-Up in Basis

• Real estate (primary residences, rentals, land)

• Stocks and mutual funds

• Bonds

• Private business interests

• Collectibles and art

• Certain crypto assets

Assets held in revocable living trusts, individual names, or joint ownership with rights of survivorship typically receive a step-up in basis. Assets held in irrevocable trusts may also qualify, but only if they are included in the decedent’s taxable estate.

Assets That Don’t Qualify for Step-Up

• Retirement accounts (IRAs, 401(k)s, etc.)

• Annuities

• Assets gifted during life (which retain the donor’s original basis)

• Some jointly-owned assets in community property states (only partial step-up)

Want to know why gifting your house to your kids during life could be a costly mistake? Read our upcoming blog on Gifting vs. Inheriting Real Estate: What You Need to Know.

Gifting vs. Inheritance: The Tax Trap Most Families Miss 

When you gift an appreciated asset during your lifetime:

• The recipient inherits your basis

• This sets them up for massive capital gains later

When they inherit the same asset after death:

• They receive a step-up to fair market value

• Capital gains tax may be entirely avoided

Bottom line: Gifting during life may feel generous, but it could create a major tax liability. Strategic inheritance often provides the better financial outcome.

How to Leverage Step-Up in Basis in Your Estate Plan

1. Hold Appreciating Assets Until Death

   • For assets likely to keep rising in value, holding until death can trigger the step-up and eliminate embedded gains.

2. Use Revocable Living Trusts

   • These trusts allow you to maintain control while ensuring the assets pass on with a step-up and avoid probate at the same time.

3. Use Portability and Spousal Strategies

   • In community property states, both halves of jointly owned assets can get a step-up in basis when one spouse dies. In separate property states, only the decedent’s portion gets the adjustment.

   • In high-asset families, using bypass trusts or marital trusts can also preserve basis step-up opportunities across both spouses’ deaths.

4. Update Asset Ownership and Titling

   • Make sure assets that you want to receive a step-up:

     • Are included in your estate

     • Are not prematurely gifted or transferred

     • Are titled correctly (especially business interests or real estate)

When Step-Up Doesn’t Help: High-Income Heirs or Future Rule Changes

The step-up in basis is a current benefit—but it’s always subject to political change. Future tax reform may:

• Eliminate the step-up altogether

• Cap the amount of gains that can be wiped out

• Require heirs to recognize gains at death (carryover basis rules)

This makes it even more important to work with a tax and estate planning team that can help you pivot if the laws shift.

Coordinating Step-Up Planning with Your Overall Strategy

Step-up in basis shouldn’t be viewed in isolation. It should be integrated into:

• Your trust and will

• Your life insurance and retirement planning

• Your business exit plan

• Your gifting and charitable giving

In some cases, it’s better to retain assets for step-up purposes, while gifting cash or lower-growth assets during life.

A personalized strategy matters.

Conclusion: Step-Up in Basis Is One of the Last Great Tax Breaks—Use It Wisely

Estate planning isn’t just about protecting your family—it’s about protecting them from unnecessary tax burdens.

The step-up in basis allows you to transfer wealth at full market value, eliminate capital gains, and create a smoother transition of assets. But the benefit only works if the structure is right.

Want to explore how to pair step-up planning with trusts, gifting strategies, and business succession? Read our blogs on Trusts, Charitable Giving, and Estate Tax Reduction next.

Your heirs deserve more than assets.

They deserve clarity, security, and a smarter tax future.