Tax

Step-Up in Basis

At death, an asset's cost basis resets to its fair-market value — erasing the unrealized gain for heirs.

When appreciated assets pass to heirs, their basis is “stepped up” to the value on the date of death, so a lifetime of capital gains can disappear for income-tax purposes. This is why holding a low-basis position until death is sometimes better than selling it — and why gifting appreciated assets during life can backfire. For households thinking about legacy, the step-up reshapes which accounts you spend from first.

A lifetime of gains, erased

When you die, the assets in your estate generally have their cost basis reset to fair-market value on the date of death. An heir who inherits a stock you bought decades ago at $10 and that's now worth $100 takes a $100 basis — the $90 of appreciation simply vanishes for income-tax purposes, and they could sell the next day with little or no capital-gains tax.

Why gifting appreciated assets can backfire

A gift made during life carries your original basis to the recipient (a “carryover” basis), so the built-in gain comes with it — while an asset held until death gets the step-up. That's why gifting a highly appreciated position to an heir who plans to sell is often worse than letting them inherit it, and why the step-up reshapes which accounts a household should spend down first. Note that traditional IRAs and 401(k)s do not get a step-up — they're income in respect of a decedent.

How Formation handles it

Formation tracks cost basis and acquisition dates across custodians and organizes holdings by entity, so the low-basis positions where a step-up matters most are legible when you and your estate attorney plan which assets to hold, gift, or spend. Formation surfaces the basis picture; the legacy strategy is yours to set with your advisors.

A worked example

You hold $2 million of stock with a $200,000 basis. Sell it in your lifetime and you face capital-gains tax on the $1.8 million gain. Hold it until death and your heirs inherit it at a $2 million basis — if they sell near that value, the $1.8 million of gain is never taxed for income-tax purposes.

Frequently asked

Do retirement accounts get a step-up in basis?

No. Traditional IRAs and 401(k)s are income in respect of a decedent — heirs pay ordinary income tax on withdrawals, with no basis step-up. The step-up applies to taxable assets like brokerage holdings and real estate.

Does jointly owned property get a full or half step-up?

It depends on titling and state law. In most states, jointly held property gets a step-up only on the deceased owner's half; in community-property states, both halves can step up. This is a detail worth confirming with your estate attorney.

In Formation

Estate & legacy planning

See this in your own numbers.

Formation organizes your whole household by entity and cites every figure to its source — the context that makes terms like this actionable.

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