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Published on: 07/29/2025 • 7 min read

What the End of Step-Up in Basis Could Mean for Your Heirs

For high-net-worth individuals and families, preserving generational wealth isn’t just about smart investing — it’s also about understanding key tax provisions. One of the most impactful is the step-up in basis rule, which can significantly reduce capital gains taxes for heirs inheriting appreciated assets like real estate, investment portfolios, or a family business.

But what if that rule disappears?

Recent discussions in Washington have suggested that the step-up in basis could be eliminated or significantly curtailed as part of a broader effort to reform tax policy and increase federal revenue. If that happens, your heirs could face a much larger tax burden, dramatically reducing the value of what you pass down.

This article explores the step-up in basis rule — what it is, which assets qualify, how a repeal could impact heirs and business owners, and, most importantly, how to prepare using strategies like trusts, gifting, tax-efficient investing, and charitable giving.

If you’re committed to leaving a meaningful financial legacy, now is the time to reevaluate your estate and tax planning strategy with Avidian Wealth Solutions.

What is the step-up basis rule?

The step-up in basis is a tax provision that adjusts the value of an inherited asset to its fair market value at the date of the original owner’s death.

A simple example: Imagine you purchased stock for $100,000. Years later, it’s worth $500,000. If you sold it during your lifetime, you’d owe capital gains tax on the $400,000 increase. But if your heirs inherit it after your death, their cost basis “steps up” to $500,000. If they sell it right away, they owe little or no tax.

This applies to a wide range of capital assets, including:

  • Stocks and bonds
  • Mutual funds and ETFs
  • Real estate
  • Private businesses
  • Certain collectibles

By resetting the cost basis, the rule wipes out unrealized capital gains at death, effectively reducing or eliminating taxes for heirs, making it a powerful tool for families looking to pass down wealth without triggering a tax hit.

What assets do not qualify for a step-up in basis?

Not every asset gets the benefit of the step-up, even under the current rules. Understanding what’s excluded is essential for building a complete wealth transfer plan.

  • Retirement accounts (e.g., IRAs, 401(k)s)
  • Pension plans
  • Annuities with earnings
  • Cash or cash equivalents (these don’t generate capital gains)
  • Assets held in certain trusts (depending on structure)
  • Gifts made during your lifetime

If the step-up in basis is eliminated for more types of assets — or altogether — then strategies that now seem secondary (like gifting or charitable contributions) may become central to avoiding higher tax liabilities.

What happens if the step-up in basis is eliminated?

If the step-up in basis is removed or restricted, heirs could inherit not only assets, but also a significant tax liability. Here’s what you need to know:

Key potential impacts

You can expect higher taxes on inherited assets as heirs would take on the original owner’s basis. Using the earlier example, if they sell the asset at $500,000 but the original basis was $100,000, they may owe tax on $400,000 in gains.

  • Immediate taxable events: Some legislative proposals have included taxing unrealized gains at death,  meaning heirs might owe taxes even if they haven’t sold anything yet.
  • Liquidity issues: If the inheritance includes illiquid assets like real estate or business interests, paying those taxes could be challenging without selling part of the asset.
  • Disruption to small businesses: Family-owned businesses passed to the next generation could face a tax bill that forces a sale or major restructuring.

This would represent a significant shift from how estate planning is currently approached, and could dramatically reduce the intergenerational wealth transfer.

Who’s most at risk?

Individuals passing down wealth

If you’ve built a portfolio of appreciated assets, the step-up in basis allows you to pass them down with minimal tax exposure. Without it, your heirs could lose a substantial portion of that value to taxes. This is especially concerning for families whose net worth is tied up in long-term investments or legacy real estate holdings.

People inheriting wealth

Heirs receiving stocks, property, or businesses would need to understand and report the original cost basis — something that’s often undocumented or forgotten. Mistakes could lead to overpayment or IRS audits.

Business owners

Family-owned businesses could be particularly vulnerable. Without a step-up, inheriting a business could mean owing capital gains tax on decades of appreciation. This may force the sale of part of the business just to satisfy tax obligations, putting jobs, clients, and legacies at risk.

Proactive planning can help avoid these challenges, even if the step-up in basis is modified or repealed.

Strategic alternatives for wealth preservation

While a repeal of the step-up in basis would be a significant change, it wouldn’t eliminate your ability to pass down wealth strategically. There are several tools that high-net-worth families can use (individually or in combination) to mitigate the potential tax hit.

1. Trust structures

Trusts can help protect and control the transfer of assets:

  • Grantor Trusts allow assets to grow outside your estate while offering flexibility
  • Irrevocable Trusts can shield appreciating assets from estate taxes (though they may not avoid capital gains taxes)
  • Trusts can also document basis, making it easier for heirs and tax professionals to calculate gains

2. Gifting strategies

Gifting during your lifetime shifts appreciation to the next generation, but it comes with trade-offs.

  • Gifting lowers your estate size (which can reduce estate taxes)
  • However, the recipient takes on your original cost basis, so capital gains may still apply
  • Using the annual gift tax exclusion and lifetime exemption wisely can help you give significant amounts without triggering taxes

3. Tax-efficient investing

A tax-aware investing approach can reduce your exposure to gains that might be taxed later:

  • Tax-loss harvesting offsets gains with losses
  • Asset location strategies place tax-efficient assets in taxable accounts and tax-inefficient ones in retirement accounts
  • Municipal bonds can generate income without triggering capital gains or income tax

4. Donor-advised funds and other charitable giving

Philanthropic strategies allow you to support causes you care about while reducing taxes:

  • Donating appreciated assets can eliminate the capital gains tax while also providing a charitable deduction
  • Donor-Advised Funds (DAFs) allow you to contribute now, receive an immediate deduction, and recommend grants over time
  • Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) are more advanced options that combine gifting with income strategies

These strategies don’t just help avoid taxes; they help define your legacy on your own terms.

5. Proactive tax and estate planning

Even without a step-up repeal, proactive estate planning is essential. With potential policy changes on the horizon, now is the time to:

  • Get accurate, up-to-date asset valuations
  • Document cost bases and ownership history
  • Update your estate plan to reflect current and future tax environments
  • Revisit your wealth transfer strategy annually with a trusted advisory team

Avidian can collaborate with your attorneys and CPAs to create a multi-generational plan tailored to your goals.

Call Avidian today to help protect your legacy tomorrow

The possible elimination of the step-up in basis should serve as a wake-up call — not just because of what may happen, but because of what it reveals: the rules that protect your wealth today may not be there tomorrow.

For high-net-worth families, business owners, and individual investors, this means taking control of your estate and tax planning strategy now.

Even if the step-up rule stays in place for the foreseeable future, many of the strategies discussed here can still enhance your tax efficiency and legacy. From customized trusts to charitable giving vehicles, the tools exist to keep your wealth working for your family, not the IRS.

At Avidian Wealth Solutions, we work with families to navigate uncertain tax environments with clarity, foresight, and purpose. If you’re concerned about what the future of tax policy may mean for your legacy, we’re here to help you prepare.

Schedule a consultation at one of our locations in Houston, Austin, Sugar Land, or The Woodlands to speak with an advisor today.

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