Estate Planning Series
Estate · Tax & Step-Up
Estate Tax + Step-Up Basis
Most people overestimate how much estate tax their family will owe. The real tax issues at death are usually NOT federal estate tax — they're missed step-up basis opportunities and state-level taxes people forget about.
The 2026 sunset
The current $13.99M federal exemption is scheduled to drop to roughly $7M per person on January 1, 2026, when the 2017 Tax Cuts and Jobs Act provisions sunset. Unless Congress extends them, many more families will become exposed to federal estate tax overnight.
The numbers that matter
Federal Estate Tax Exemption (2025)
$13.99M
Per person. A married couple can shield up to $27.98M. Scheduled to drop to ~$7M per person on Jan 1, 2026, unless Congress acts.
Annual Gift Tax Exclusion (2025)
$19,000
Per recipient, per year. You can give $19K to as many people as you want each year without using your lifetime exemption.
Step-Up in Basis at Death
Full
Inherited assets get their cost basis reset to fair market value at death. Heirs who sell pay capital gains only on appreciation AFTER the inheritance.
Federal Estate Tax Rate
40%
On amounts ABOVE the exemption. Only applies to roughly 0.1% of estates today — but more if the 2026 sunset happens as scheduled.
Federal estate tax rate on amounts above the exemption
Today the exemption is high enough that only ~0.1% of estates owe federal estate tax. But state estate or inheritance taxes apply in roughly 17 states — at much lower thresholds.
The single biggest tax win: step-up in basis
When you inherit an asset, its cost basis is "stepped up" to the fair market value at the date of death. This wipes out the entire capital gains tax liability on appreciation that happened during the deceased's lifetime.
Example: Your parents bought their home in 1985 for $80K. It's worth $600K today. If they sold during life, they'd owe capital gains on $520K of appreciation. If they pass it to you at death — basis steps up to $600K. You sell it the next day. Zero capital gains tax.
The trap: Adding kids to the deed or gifting assets during life loses the step-up. The kids inherit the original basis, owing capital gains on every dollar of appreciation when they sell. Well-meaning parents accidentally cost their heirs tens of thousands all the time.
Make sure step-up isn't accidentally lost.
We'll review your titling and gifting plans — and flag the moves that quietly trigger taxes your family didn't see coming.
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Sources
Educational content only. Not tax advice. State estate and inheritance taxes vary widely. Consult a licensed CPA and attorney for your specific situation.