Step-Up in Basis at Death for Concentrated Positions: Planning Around It
The basis step-up at death under IRC 1014 eliminates embedded gain on concentrated stock. For older holders with low basis, 'hold to step-up' can beat any diversification strategy.
An 80-year-old founder holds $40 million of stock she acquired for $50,000 at incorporation 35 years ago. Basis: almost zero. If she sold today, federal tax at 23.8% would be $9.5 million. She doesn’t need the cash; she has $20M of diversified assets from earlier partial sales.
Her estate planner suggests the simplest strategy: hold until death. Under IRC §1014, her heirs inherit the stock with a “stepped-up” basis equal to the fair market value at her death. The $40M of embedded gain evaporates. Heirs can sell immediately with no capital gain tax.
The cost: she continues to bear concentration risk on $40M. If the stock halves, heirs still get the stepped-up basis (at the lower value), but the family loses $20M of wealth. If the stock doubles, heirs get stepped-up basis at higher value, and the family benefits from appreciation.
For older holders with low basis and low need for the cash, the step-up strategy is often mathematically superior to any diversification technique. Understanding when it applies and how to plan around it is central to late-stage concentrated-equity planning.
The basic mechanic
IRC §1014 provides that property acquired from a decedent has a basis equal to fair market value at the decedent’s death (or at the alternate valuation date, six months later, if elected and estate tax is owed).
For appreciated stock:
- Decedent’s basis: $50K (from original purchase).
- FMV at death: $40M.
- Heir’s basis: $40M.
- Embedded $39.95M of gain: gone for tax purposes.
If heir sells immediately, proceeds are $40M, basis is $40M, gain is $0. No capital gain tax.
If heir holds, subsequent appreciation is taxed at the heir’s eventual disposition.
Estate tax vs income tax: the offset
The step-up is not free. The stock’s FMV at death is included in the decedent’s gross estate for federal estate tax purposes.
For 2025, the lifetime estate and gift tax exemption is $13.99M per person. Above that, estate tax applies at 40%.
For a $40M stock in a decedent’s estate:
- Estate tax on the amount above exemption (simplified): ($40M - $13.99M) × 40% = $10.4M.
- This assumes no other estate assets; realistically, estate is taxed on total estate value.
So the step-up saves $9.5M in income tax but creates $10.4M in estate tax (approximate; actual depends on total estate and exemption usage).
Net: roughly break-even for a single decedent at this wealth level. For larger estates (where exemption is already used), estate tax on the additional stock is 40%; still often favorable compared to 23.8%+ income tax.
For smaller estates (below exemption), the step-up is free money: estate tax is zero; income tax savings are 23.8%+ of the gain.
The 2026 exemption sunset
The 2017 TCJA doubled the exemption effective 2018. The increase sunsets Dec 31, 2025. Without legislative action, 2026 exemption drops to roughly $7M per person.
For a holder dying in 2025 with $40M estate: exemption $13.99M, estate tax on $26M at 40% = $10.4M.
For the same holder dying in 2026 at same estate value: exemption $7M, estate tax on $33M at 40% = $13.2M.
The sunset adds $2.8M of estate tax for the same estate. Planning to use the 2025 exemption (via gifts to trusts) before year-end can lock in the higher exemption and reduce eventual estate tax.
The “hold to step-up” strategy
For an older holder with low basis and moderate-to-high concentration:
- Diversifying today triggers income tax.
- Holding to death avoids income tax but creates estate tax.
- Net outcome depends on the relative rates and amounts.
When hold-to-step-up wins:
- Income tax rate (23.8-37%+) is higher than estate tax rate (40% on marginal, but often less as a percent of total due to exemption).
- Holder is likely to die within a few years (long hold-to-death horizon adds volatility risk).
- Estate already exceeds exemption, so estate tax is owed regardless; the question is just whether income tax is additionally owed.
- Holder doesn’t need the cash during life.
When hold-to-step-up loses:
- Holder needs liquidity during life (sale is forced).
- Estate is below exemption; holding adds no tax; selling adds income tax.
- Concentration risk is existential (stock could go to zero or close).
- Holder is young; long lifetime means significant market volatility.
Planning around the step-up for large estates
For estates significantly above exemption, the step-up is still valuable but comes with estate tax. Common planning layers on top:
Gifts to use exemption during life. Gift $13.99M (2025) to heirs or trusts. The gifted amount is out of the estate. No step-up on the gifted basis (carryover basis). Grantor’s remaining exemption is consumed.
For high-basis assets, gift them (no step-up benefit lost). For low-basis assets, keep them in estate (step-up benefit preserved).
Gifts to irrevocable trusts for heirs. Same as direct gifts but with more protection and control. Exemption consumed, appreciation thereafter outside estate.
Dynasty trusts. Multi-generational, GST-tax-exempt. Appreciation outside estate for generations.
Grantor trust payment of income tax. Grantor pays tax on trust income; effectively additional non-gift transfers. Reduces grantor’s estate further.
The “double basis step-up” for community property
In community property states (CA, TX, NV, AZ, NM, WI, WA, ID, LA), the entire community property receives a full step-up at the death of either spouse. This is “double step-up.”
Example: California couple owns $10M of stock as community property with basis $1M. Husband dies. Whole $10M gets stepped up to $10M FMV. Surviving wife’s basis in the stock: $10M.
Compared to separate property states where only the decedent’s half gets stepped up: wife’s half stays at her original basis; husband’s half gets stepped up. Basis is $500K + $5M = $5.5M, not $10M.
Community property treatment can be worth millions in eventual tax savings for couples in CP states.
What happens at the alternate valuation date
IRC §2032 allows the executor of an estate to elect the “alternate valuation date” for estate valuation: six months after the date of death. The election is available only if:
- Total estate value decreases as a result.
- Estate tax decreases as a result.
If elected, all property is valued at the alternate date (not just selected assets). For stock that drops significantly in the six months after death, alternate valuation reduces estate tax. But the heir’s basis also drops to the lower value.
Net effect: lower estate tax AND lower heir basis. Often a wash or slightly negative for the heir’s future tax position.
Comparison: step-up alternatives for a low-basis holder
Holder age 70, $40M stock with $50K basis, California resident, no urgent liquidity need.
| Strategy | Income tax during life | Estate tax at death | Heir’s basis |
|---|---|---|---|
| Hold to death | $0 | $10.4M | $40M |
| Sell now, diversify | $12.9M (23.8% + 13.3%) | Less (smaller estate) | N/A |
| Gift $13.99M to SLAT | $0 today on gift; SLAT-side tax later | Less estate tax | Carryover on SLAT portion |
| CRT | Spread over lifetime | Less estate tax | N/A |
Hold-to-step-up wins income-tax-wise. Diversification plus estate planning often wins total-cost-wise for very large estates.
Frequently asked
Does step-up apply to inherited IRAs or 401(k)s? No. Retirement accounts don’t get a basis step-up. They are income in respect of a decedent (IRD) items; heirs owe income tax on distributions.
Does step-up apply to QSBS? Yes. QSBS stock held to death gets a basis step-up. If the holder dies before the 5-year QSBS holding period is met, the QSBS exclusion is lost, but the step-up still applies. Heirs can sell at stepped-up basis with no gain.
What about step-up for foreign assets held by a US decedent? Yes, §1014 applies. Foreign-situs property gets the step-up.
Does step-up apply if the stock is in an irrevocable trust? Depends on whether the trust is a grantor trust included in the grantor’s estate. Non-grantor trusts get no step-up at grantor’s death; grantor trust assets that are in the grantor’s estate get step-up.
What happens to QSBS if heirs get stepped-up basis? The $10M QSBS exclusion is based on the original holder’s basis. Heirs inherit with stepped-up basis, meaning less gain to exclude. But if there’s no gain (due to step-up), nothing to exclude.
Next step
If you are older and hold concentrated low-basis stock, discuss hold-to-step-up with your estate planning counsel. Factor in your estate size (relative to exemption), your basis, your liquidity needs, and your heirs’ circumstances. Consider layering hold-to-step-up with gifts to irrevocable trusts using 2025 exemption before the sunset. The decision is not all-or-nothing; partial holding + partial diversifying is often optimal.
Nineteen years doing trusts and estates work for tech wealth in the $15M to $200M range. Reviews VestedGrant's estate planning content.
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