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 did not happen
The One Big Beautiful Bill Act, signed July 4, 2025, set the federal exemption at $15M per person ($30M per married couple) starting January 1, 2026. It rises with inflation and has no scheduled end date. The 40% rate above it did not change. Congress can always change the law later, but for now most families will never owe federal estate tax. Step-up in basis still matters for everyone.
The numbers that matter
Federal Estate Tax Exemption (2026)
$15M
Per person. A married couple can shield up to $30M. Set by the One Big Beautiful Bill Act, it rises with inflation and has no scheduled end date.
Annual Gift Tax Exclusion (2026)
$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. With the exemption at $15M per person, very few estates ever pay it.
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.
Common questions
Do I have to pay estate tax?
Only if your estate is above the federal exemption, which is fifteen million dollars per person starting in 2026 and indexed after that. Michigan has no state estate tax.
What is step up in basis?
When you die, the cost basis of assets you leave resets to their value on that date, so heirs can sell without capital gains tax. Giving those assets away during life forfeits it.
Should I gift my house to my kids to avoid estate tax?
Usually not. Gifting during life gives up the step up in basis and can create a capital gains bill that is larger than any estate tax saved.
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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.