Capital gains step-up tax savings

Step-up — the most powerful estate planning tool

Inherited assets get a "stepped-up basis" to fair market value at the decedent's death. The decedent's original cost basis is forgiven for capital gains purposes. The unrealized appreciation that built up over decades — gone, no tax.

The math

unrealized gain = current value − original basis
tax saved = unrealized gain × (federal LTCG + NIIT + state)

A $200k stock position bought decades ago, now worth $800k, with default rates: $600k gain × ~32.8% combined = $197k saved.

When step-up doesn't apply

• Pre-mortem gifts — basis carries over, no step-up
• Joint tenancy — half-step-up only (in non-community-property states)
• Roth IRAs — already tax-free, no benefit
• Pre-tax 401(k) / IRA — taxed as ordinary income to heir, no step-up
• Annuities + IRAs in trusts — special rules, often no step-up

The community property advantage

In community property states (CA, TX, AZ, NV, NM, ID, WI, LA, WA), surviving spouses get a double step-up — the entire community asset gets stepped up to FMV at first death, not just the deceased's half. This is one reason community property states matter for high-net-worth couples.

What's at risk politically

Several proposals would cap or eliminate step-up. Currently safe through at least 2025. Estate plans that ASSUME indefinite step-up are exposed; sensible planning hedges with partial gifting + grantor trusts.