Step-up in basis is a tax rule under which the cost basis of inherited property is adjusted to its fair market value on the decedent's date of death (or alternate valuation date if elected). This means that unrealized capital gains during the decedent's lifetime are effectively erased for the heir, who can often sell the inherited asset with little or no capital gain tax. Step-up in basis applies to many appreciated assets such as stocks, real estate, and closely held business interests, but not typically to items like retirement accounts. The rule significantly influences estate planning, investment strategies, and decisions about whether to gift assets during life or hold them until death.

Advisors discuss step-up in basis when helping clients decide which assets to spend, hold, or gift. They explain that appreciated property left at death may receive a step-up, while assets gifted during life carry over the donor's basis, potentially increasing heirs' capital gains. Life insurance is often used alongside step-up in basis planning to provide liquidity for estate taxes, equalize inheritances, or preserve concentrated positions. Advisors also track legislative proposals that could modify or limit step-up benefits. Understanding step-up in basis helps advisors coordinate income tax and estate tax outcomes and avoid strategies that inadvertently increase the family's overall tax burden.