Building wealth is hard; preserving it through life’s final paperwork can be harder. Many families discover too late that “inheritance taxes” are not a single bill.

Estate tax and capital gains tax can vary by jurisdiction, hit at different times, and require different planning. Knowing how step-up works can prevent avoidable cash crunches.

Two Taxes

Estate tax is calculated on the total value of assets at death once the applicable exemption threshold is exceeded, and it is paid by the estate before heirs receive full control. Capital gains tax is separate: it applies only if heirs sell an inherited asset for more than its tax basis. Mixing the two is where confusion starts.

Step-Up Basics

A step-up in cost basis resets the tax basis of inherited assets to their fair market value on the date of death. That reset can erase decades of built-up appreciation for capital gains purposes. It does not erase estate tax, but it can stop a second tax from piling on later when heirs sell.

Big Estate

Picture a $50 million home bought long ago for $1 million. If heirs sell after inheriting, step-up rules can reduce the taxable gain to near zero if the sale price matches the inherited value. However, if the overall estate exceeds federal exemptions, estate tax may still apply, creating a large bill even with a basis reset.

Liquidity Pressure

The tricky part is timing. Estate tax deadlines can arrive quickly, and a single property may not produce cash fast enough. Executors may need to tap liquid savings, borrow against the property, request installment payments, or use insurance arranged outside the estate to cover the bill without a rushed sale.

Double Tax Trap

The step-up’s real value is avoiding double taxation on the same growth. Without a basis reset, heirs could face estate tax on the estate’s value and then capital gains tax on decades of appreciation if they sell. With step-up, that second layer can shrink dramatically, leaving only the estate tax where it applies.

Stock Example

Now consider a $45 million stock portfolio with a $2 million cost basis. A basis reset lets heirs sell with little or no capital gains tax if prices hold near the date-of-death value. If the estate is above the exemption, estate tax still reduces what transfers, but the stepped-up basis applies to the full inherited value.

Below Threshold

Step-up can be a game-changer even when no estate tax is owed. Imagine a $4 million rental property inside a $5 million estate. Under today’s high federal exemptions, the estate may owe nothing. Yet the basis reset can remove a large built-in gain, allowing heirs to sell without a massive capital gains hit.

Gift Timing

Giving appreciated assets during life often transfers the original cost basis to the recipient. That can be a hidden cost: if the recipient sells later, capital gains tax may apply to the entire appreciation since the original purchase. For many families, holding certain assets until death can be more tax-efficient than gifting early.

Trust Reality

Revocable living trusts are popular because they simplify settlement and can keep details private, but they usually do not reduce estate tax. Assets commonly remain part of the taxable estate, meaning the estate tax calculation still counts them. Trusts can preserve step-up treatment, yet separate strategies are needed to lower taxable value.

Planning Tools

When estates are large, planning becomes both tax and logistics. Techniques that shift future appreciation out of the estate, disciplined annual gifting within allowed limits, and charitable strategies can reduce exposure over time. Equally important is liquidity planning, so heirs are not forced into selling long-term assets at unfavorable prices. Michael Kitces, a financial planner, writes, “The step-up in basis at death can be a powerful planning tool for minimizing an individual’s capital gains taxes from the sale of appreciated assets.”

Retirement Caveat

Not every asset receives a basis reset. Many tax-deferred retirement accounts are typically taxed as withdrawals occur, often at ordinary income rates for heirs. This makes beneficiary choices and withdrawal planning important. Some households hold taxable assets for step-up benefits while using retirement distributions during life to manage future tax brackets.

Practical Moves

Start with a clear inventory: asset values, cost bases, ownership titles, and expected liquidity needs. Then stress-test what happens if exemptions fall or if the estate is illiquid. Finally, coordinate documents and beneficiaries with experienced tax and estate professionals so the plan actually works in real life, not just on paper.

Conclusion

Step-up in cost basis is a powerful cleanup tool: it can erase capital gains taxes on lifetime appreciation, even if estate tax still applies to very large estates. Pair it with liquidity planning and thoughtful structures, and heirs may reduce the risk of rushed sales and costly timing mistakes.