By Colleen Weber, CFP®, CPA

If one of your goals is passing assets to the next generation, it’s smart to consider how taxes could affect the legacy you leave behind. Many people are surprised to learn that the way assets are transferred can have a significant impact on how much of their wealth ultimately stays with their loved ones.

One estate planning strategy that may help is the tax provision known as a step-up in basis. Depending on your circumstances, it can reduce the capital gains taxes your heirs may owe if they later sell inherited assets. While it’s only one piece of a comprehensive estate plan, it can play an important role in preserving family wealth.

Every family’s situation is different, which is why I believe estate planning should never be one-size-fits-all. In this article, I explain how a step-up in basis works and why it may be an important consideration when passing assets to your heirs.

What Is Step-Up in Basis?

Step-up in basis allows the people who inherit your appreciated assets, such as stocks or real estate, to avoid a capital gain being triggered. The basis is the value of a piece of property from which capital gains taxes are calculated when you sell the property for a profit.

Section 1014 of the Internal Revenue Code grants certain property held at your death a new basis equal to the fair market value at the time of your death. That’s the step-up in basis your beneficiary receives. The IRS also grants the inheritor a long-term capital gain rate if the property is sold.

How the Step-Up in Basis Works When Passing Assets On

All assets have a cost basis—the price you paid for something. When that asset is sold, the difference between what you paid for it and the sales price is a capital gain (or loss), and capital gains are taxed.

If you bought shares of IBM stock for $100,000 decades ago and it was worth $500,000 at your death, the capital gain would be $400,000 if sold immediately. That could result in a significant tax burden on your beneficiary.

However, the step-up in basis resets the cost basis to the fair market value of $500,000 for your heir. If the stock was sold immediately at $500,000, your inheritor would owe no capital gains tax. They would owe a reduced tax if the stock was sold later at a higher price.

Assets That Receive a Step-Up in Cost Basis

When passing assets on to beneficiaries, not all qualify to receive a step-up in basis. Here are the assets that do:

• Real estate
• Individual stocks, bonds, and mutual funds
• Household furnishings
• Artwork
• Jewelry
• Collectibles
• Some business interests

Consider talking with a financial or wealth advisor to understand how the step-up in basis might impact your situation and assets.

The Benefits of a Step-Up in Basis

The step-up in basis can play a crucial role in estate planning, including choosing whether to sell, gift, or bequeath an asset. A step-up in basis can:

• Reset the cost basis to reduce capital gains taxes for an heir
• Lower the tax burden to preserve family wealth
• Incentivize holding assets for the long term
• Simplify tax reporting

The step-up in basis is a tool you can use in estate planning to structure assets to reduce tax burdens on inheritors.

Creating a Strategy for Passing Assets

Every estate plan is unique, and the right strategy for passing assets depends on your goals, your family, and the legacy you want to leave behind. A step-up in basis is just one of the many planning tools I may consider when helping clients develop a thoughtful, tax-efficient estate plan.

If you’d like to explore how your estate and legacy plans fit into your overall financial picture, I’d be happy to help. At Colleen Weber CPA, CFP^®, I work with clients to create financial strategies that reflect their values while helping preserve wealth for future generations. Reach out to book a free introductory meeting online or call (952) 470-0750

About Colleen

Colleen Weber, CFP®, CPA, is a fee-only financial advisor and CPA based in Chanhassen, Minnesota, with over 20 years of experience in comprehensive wealth management. She specializes in tax-efficient financial planning and investment strategies for retirees, busy professionals, and women seeking to pursue their long-term goals.