It’s often said that nothing in life is certain except death and taxes, but oddly enough, the tax code makes one major exception when the two combine. When you die, most of your taxable investment gains simply disappear.
That’s thanks to something called the step-up in basis. At death, your assets are revalued for tax purposes at their current market price. So, if you bought Apple stock for $10,000 years ago and it’s worth $100,000 when you pass, your heirs inherit it with a new “cost basis” of $100,000. If they sell the stock the next day, they owe no capital gains tax on that $90,000 of lifetime growth.
For families with significant taxable investments or real estate, that rule can translate into huge savings. It’s one of the moments when the tax code actually favors long-term investors—but it’s not guaranteed forever.
When the Step-Up Doesn’t Apply
Not every asset qualifies. Retirement accounts like IRAs and 401(k)s don’t receive a step-up — your heirs still owe income taxes as they draw down those balances. And most heirs will have to drain accounts like this within 10 years, which can cause a big headache and an even bigger tax bill. Similarly, gifting assets during your lifetime passes along your original cost basis, not a new one. Many well-intentioned parents gift stock or property to children, thinking they’re helping, when in fact they’re transferring a hefty future tax bill.
Why This Matters Now
Understanding how it works can shape smarter planning today, like deciding whether to sell or hold appreciated assets, when to gift, and how to title property between spouses.
At Hanover Advisors, we often tell clients that estate planning isn’t just about who inherits, but how. The step-up in basis is one of the clearest examples, and one of the best reasons to coordinate your investment, tax, and legacy strategies long before that final tax break ever comes due.