Assets That Qualify for a Step-Up in Basis at Death

The step-up in basis is a valuable tax provision that can significantly benefit those inheriting assets. It adjusts the asset's cost basis to its fair market value at the time of the deceased's death. This adjustment can substantially reduce or even eliminate capital gains taxes when the heir eventually sells the asset.

However, not all assets qualify for this favorable treatment. Understanding which assets are eligible and which are not is essential for comprehensive estate planning and wealth transfer strategies.

Assets Eligible for a Step-Up in Basis

Several types of assets are commonly eligible for a step-up in basis:

Real Estate: This includes residential properties, commercial buildings, and land. The fair market value at the time of death becomes the new basis.

Stocks and Bonds: Investments held in taxable accounts receive a step-up in basis.

Collectibles and Personal Property: Items like artwork, jewelry, and antiques are also eligible, though appraisals may be necessary to determine fair market value.

Assets held in a Revocable Trust: Assets held in a revocable trust will qualify for step up in basis.

Assets That Do Not Qualify for a Step-Up in Basis

Certain assets do not receive a step-up in basis, and their treatment should be carefully considered during estate planning:

Retirement Accounts: Assets held in tax-deferred retirement accounts like 401(k)s and traditional IRAs do not receive a step-up in basis. Heirs will pay income taxes on distributions.

Assets gifted before death: Assets gifted before death are assigned according to the original cost basis.

Irrevocable Trusts: Assets held in irrevocable trusts typically do not qualify for a step-up in basis.

Planning Considerations

Strategic estate planning is essential to maximize the benefits of the step-up in basis and minimize potential tax liabilities for your heirs.

Consult with qualified professionals: Engage with tax advisors, financial planners, and estate attorneys to develop a comprehensive plan tailored to your specific circumstances.

Review and update your plan regularly: Tax laws and personal circumstances change, so it's crucial to review your estate plan periodically to ensure it remains aligned with your goals.

Consider gifting strategies: While gifted assets do not receive a step-up in basis, gifting can still be a valuable tool for reducing the size of your taxable estate.

Take Action Now

To protect the assets you’ve worked hard to accumulate, be proactive in estate planning. A failure to act could have costly tax implications for your family.

Identify all assets you want to pass on to your heirs. Determine which assets qualify for a step-up in basis and which do not.

Consult with estate planning experts to create or adjust your estate plan.

This article is general information, not advice for your situation. Facts and thresholds change; confirm before acting.