STEP UP BASIS AT DEATH: Definition, and Eligibility (+ Helpful Tips)

Step up basis at death
Ross law firm

Step up in basis is a strategy that individuals use to prevent taxes on capital gains when a property is handed on to them after death. Does this sound new to you? Then, you should study this article to guide you and give a better understanding of the step-up basis at death. And with the question, “Do assets owned by an Irrevocable Trust Get a Step-up Basis at Death?” We’ll also look into Step up Basis at Death of spouse Community Property. Let’s hit the ride!.

What Is Step up at Death?

Step up in basis is a strategy for preventing taxes on capital gains when a property is handed on to heirs after death. The heirs acquire a basis in inherited property equal to the fair market value on the date of death.

Understanding Step-up Basis at Death

More than the definition. Having a better understanding of the step-up basis at death will help you to know what to do or rather expect. Hence, the following will help you plus the examples that I use to make it clearer. 

A step-up in basis changes the cost basis of an inherent asset from its original purchase price. It changes it to the asset’s greater market value during the period of the owner’s death.

Assume Helen buys a share of stock at $2 and dies when it is worth $15 on the market. If Helen had sold the shares before dying at $15. She (or her estate after her death) would have been subject to capital gains tax on a $13 gain.

Rather, her heir’s cost basis rises to $15. Ensuring that no capital gains tax is required if the stock is eventually purchased at that price. The capital gains tax would have been required on the increase in share price from $2 to $15. That is if Helen had not died is never received.

What Exactly Is the Capital Gains Tax?

You have been seeing “capital gains tax” in this article. That is if you are really following and you might be asking “what is capital gains tax?”. 

Capital Gains Tax is a tax on the profit made when you sell anything that has gained in value, such as an ‘asset.’

It is vital to understand capital gains tax in order to properly enjoy the advantages of a step-up in basis. You must pay capital gains tax on any asset that is worth more when you sell it than it was when you purchased it.

Assume you paid $1 for a share of stock. If you decide to sell the stock after two years, it is worth $5. The difference of $4 would be taxed at the long-term capital gains rate.

The amount of time you keep the asset will influence your capital gains tax rate. You will be taxable at the short-term capital gains rate if you keep an asset for less than a year. Short-term capital gains are taxable at the same rate as ordinary income.

However, if you keep the item for more than a year. You would have to pay the long-term capital gain rate, which can range from 0% to 20%. It is important to note that inherited property is always viewed as a long-term capital gain advantage.

Do Assets Owned by an Irrevocable Trust Get a Step-up Basis at Death

It’s only wise to ask questions about how to deal tax of certain assets when you receive an inheritance. 

Whether stocks, bonds, ETFs, or mutual funds are transferred in a taxable brokerage account. In or irrevocable living trust step up basis at death on assets owned, the recipient typically receives a “step-up” on a cost basis. A step-up basis raises the asset’s tax value to its market value at the time of death.

What types of assets qualify for a step-up?

Non-retirement assets: including a brokerage account, an inherited property, antiques/art/collectibles. Or even other real estates, are often eligible for a cost basis step-up.

Retirement and IRA accounts do not obtain a step-up basis. The reason is that it is occasionally preferable to leave a brokerage account to heirs rather than a retirement account. 

It’s also worth mentioning that the step-up basis at death does not happen by itself. If the funds were not managed by a financial advisor, you will need to complete paperwork with the custodian. Inherited real estate, such as a house, must be assessed by a professional. Likewise, a professional valuation will be required for interests in a closely held corporation.

The type of asset bequeathed. Ownership at death and state legislation all play a role in qualifying for a stepped-up cost base. It makes no difference if the decedent was your partner, parent, or other forms of non-spouse. Community property states, which normally have the most beneficial step-up laws, are an exception.

Do assets held in trust get a step-up in basis?

The answer is yes or no, depending on. If the item was kept in a revocable (or living) trust before the individual dies. It will almost certainly be eligible for a cost basic step-up. Assets other than financial accounts can be held in trust. A property, as well as other types of real estate, can be placed in trust.

Assets held in an irrevocable trust owned are unlikely to benefit from a step-up basis at death. In summary, if the asset was part of the decedent’s estate, it is usually eligible for a step-up. This can become very complicated, so it’s critical to collaborate with the estate planning attorney while settling the estate.

Assets that are transferred outside of the estate via a trust or another structure are ineligible for a step-up basis.

Step up Basis at Death of Spouse Community Property

The double step-up in basis rule is available to residents of nine community property states, including California. The rule gives the survivor spouse a step-up in basis at death on community property. (That is all assets gained during marriage apart from inheritances and gifts).

For some states, properties possessed exclusively by the surviving spouse do not obtain a step-up basis at death. And joint ownership assets receive just half of the step-up in basis that they would in a community property state.

Under the federal tax code. Alaska, Kentucky, South Dakota, and Tennessee permit both residents and non-residents to establish community property trusts. That qualifies owned assets for community property tax treatment, along with the double step-up in the basis rule

In a scenario where Ann and William. A hypothetical married couple who lives in a common-law state instead of a community property one. At the time of William’s death, they had $200,000 in shares in a joint brokerage account with a $100,000 cost basis. Ann would be eligible for a step-up on the basis of William’s half of the brokerage account. Or $100,000 in present value, under common law standards enacted in most states, although not on her half. As a result, the tax basis for stock kept in the account would be $150,000 rather than $200,000. That is as in community property states or community property trusts.

It is significant to mention that the surviving spouse, is anywhere in the United States. Would be eligible for the step-up basis on inherited assets formerly possessed entirely by the deceased, just like any other heir.

In Community Property, How Is Step-up Basis at Death Treated Differently?

The spouse that is to benefit obtains a step-up in basis for community property in community property states.  In the preponderance of jurisdictions without community property legislation, jointly-owned property, like as stock in a joint brokerage account. They would get just half the step-up in cost basis after the death of a spouse, relative to the same account in a community property state.

Step-up in Basis as a Tax Loophole

The step-up in base tax provision has frequently been characterized as a tax loophole for the richest families.

According to the Congressional Budget Office (CBO). The highest 5% of taxpayers by income receive approximately half of the total benefit.

In 2020, the CBO anticipated that the provision would cost $110 billion in lost tax revenue over a 10-year period.

Some supporters of the step-up basis have claimed that abolishing it would disincentivize saving. And expose estates to double taxation in conjunction with the federal estate tax

With the increase of the federal estate tax exemption in 2017. A modern-era low 0.04 percent of adult deaths triggered an estate tax payment in 2020. 14

In 2021, a plan endorsed by President Joe Biden and other Democrats to remove the step-up in basis for married couples with assets over $2.5 million (plus $250,000 for a residence) failed to get congressional approval.

Is Basis Step-up a Tax Loophole?

The step-up in basis is a legal mandate element of the United States tax code. Yet it is unquestionably responsible for a considerable loss of public income. Because the exclusion from taxes on capital gains on assets retained until death advantages the wealthiest households disproportionately, negative remarks are likely to persist.

What Is the Adjusted Cost Basis (ACB)?

In real estate, the adjusted cost basis (ACB) is the total worth of the property’s purchase cost including any capital improvements made to the property, less any tax credits received.

A property owner’s tax liabilities can change drastically if they opt to sell before death or leave it to someone else. Let’s take a look at two different circumstances.

#1. Tax Liability With No ACB

Assume a philanthropist paid $100,000 for property 5 years ago. They sold the property one week before their death. At that time, the estate would still be liable for the capital gains taxes that relate to its $100,000 initial cost basis. As a result, they require the recipient of their estate to pay taxes depending on the initial cost basis of $100,000.

#2. The ABC Tax Liability

In this example, suppose the giver kept the asset until their demise. According to the benefactor’s death, the heir will get a step up in basis to the benefactor’s fair market value. At the moment of the benefactor’s death.

About a week before the benefactor’s death, the heir chooses to sell the asset. The worth of the asset does not increase at all between the date of the benefactor’s death and the period of sale. As a result, the heir will not have to pay any capital gains taxes.

What if I Don’t Plan On Selling the Property?

You may not want to sell a property that you have inherited. Though you will not have to pay capital gains taxes on the sale of the property. Your heirs will certainly benefit from the appreciation. However, If your successors choose to sell the assets, the existing law allows them to defer taxes for future generations.

When a successor down the line decides to sell. The vendor will only have to pay capital gains taxes on the increase in the property’s value since their surviving parent’s death. They will not require the successor to pay capital gains taxes. Which is all of the appreciation that has transpired since their great-grandparents purchased the property, less whatever they paid.

How Does A Step-Up In Basis Work With Trusts?

The grantor (the trust owner) has power over the trust while the conditions of the trust are being met in revocable and living trusts. After the grantor’s passing, the property is given to the beneficiaries. The same principles described above apply in most cases to step up in base. Step-up in basis may, however, take a variety of forms when applied to irrevocable trusts because the approach will vary depending on the structure and type of trust. Grantor trusts, for instance, have different rules than non-grantor trusts.

Before creating a trust, it is advisable to consult with a financial advisor and an estate planning lawyer who can walk you through every step of the procedure. Working together with experts ensures that your trust complies with all applicable federal and state legislation and carries out your wishes after your passing.

Is Step-Up In Basis A Tax Loophole?

Although it has been said that the tax provision unfairly benefits wealthier families and widens the wealth disparity, it is not technically a loophole. According to proponents, the step-up in basis minimizes double taxation and encourages Americans to save money and invest in assets that will increase in value.

President Biden’s proposal to tax estates for unrealized capital gains surpassing $1 million per individual in 2021, regardless of whether the heir sells the asset, is one recent attempt to allay fears. In addition, gifts and inheritance of valuable property would be treated under this proposal as realization events, necessitating payment of capital gains taxes at the time of transfer.

The step-up in basis clause is still in effect because this plan was left out of the Ways and Means Committee’s 2021 tax package.


In summary, a step-up basis at death is basically a strategy for preventing taxes on capital gains when a property is handed on to heirs after death. The heirs acquire a basis in inherited property equal to the fair market value on the date of death.

Step-Up Basis at Death FAQs

How do you calculate step-up in basis at death?

You can calculate the step-up basis at death by using the date of the death.

Who gets stepped up basis?

The beneficiary is usually the heir to the demised which can be a father or parents.

Do assets owned by a trust get a step up basis at death?

When the grantor dies, revocable trusts, like assets kept outside of a trust, receive a step-up in basis, so that any gains are based on the asset’s value.

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