Step-up in basis at death
Step-up in basis is the tax rule that resets the cost basis of your assets to their fair market value on the date of your death. Your heirs are treated as if they bought your home and investments at their current value — generally without owing capital gains tax on the increase that built up while you owned them.
These are the questions that matter most when you’re thinking about step-up in basis.
What is step-up in basis?
It’s the rule that resets the starting value of your assets to their fair market value at death. Your heirs are treated as if they bought the asset at its current value — not what you originally paid.
Your original basis
What you paid
- The price you paid for the asset
- Plus the cost of improvements over time
- The starting number for capital gains math during your life
Your heir’s basis
Value at your death
- The asset’s fair market value on your date of death
- Resets the starting number for your heir
- Wipes out the appreciation that built up during your life
How does it save my heirs money?
Capital gains tax is calculated on the difference between an asset’s sale price and its cost basis.
The step-up resets that basis to the date-of-death value, so heirs who sell soon after inheriting generally owe little or no capital gains tax on the appreciation that built up while you owned the asset.
Does an irrevocable trust kill the step-up?
Not necessarily. The answer depends on whether the trust is drafted as a grantor trust — and that choice can preserve the step-up while still serving the trust’s other purposes.
| What happens to the step-up | Plain irrevocable trust | Grantor trust (including grantor MAPTs) |
|---|---|---|
| IRS treats the assets as still yours for income-tax purposes. | ||
| Step-up generally preserved at your death. | ||
| Heirs inherit at date-of-death basis. | ||
| Pairs cleanly with Medicaid and asset-protection goals. | ||
| Trust assets are not part of your estate at death. | ||
| Generally no step-up at your death. | ||
| Heirs may owe capital gains on lifetime appreciation. | ||
| Useful where step-up preservation is not a goal. |
What happens at the death of a spouse?
Step-up applies to the share owned by the spouse who died. In Alabama, a common-law state, the deceased spouse’s half steps up; the surviving spouse’s half waits until the second death.
At the first spouse’s death
Half the assets step up
The deceased spouse’s share gets a step-up. The surviving spouse’s share keeps its original basis. Future appreciation on the surviving share accumulates from there. Joint titling and trust drafting matter for how the share is measured.
At the second spouse’s death
The remaining share steps up
The surviving spouse’s share gets its step-up. Heirs inherit at the final date-of-death value. The full basis adjustment is captured across both deaths. Planning during life can affect how this plays out.
How Brent helps you
- Walks you through how step-up in basis would actually apply to your specific assets
- Explains how much your heirs may save by inheriting at current value rather than your original cost
- Drafts irrevocable trusts as grantor trusts so the step-up is generally preserved
- Coordinates titling and trust design so step-up applies cleanly at each spouse’s death
Are you set up to capture the step-up?
Five quick questions about ownership, gifting, and timing.
60-second guided check. Bring the result to your consultation.