step-up in basis

A step-up in basis resets the cost basis of an asset you inherit to its fair market value on the date the owner died. Basis is the number used to figure gain when you sell. A higher basis means less taxable gain. The IRS says the basis of inherited property is generally its fair market value at the date of death.

A round example. For example, a parent bought stock for $10,000 and it is worth $100,000 at death. A child who inherits it has a basis of $100,000. If the child sells at $100,000, there is no gain. If the parent had given the stock during life instead, the child would take the parent's $10,000 basis, per the IRS gift rules, and owe tax on the $90,000 gain. These numbers are for illustration only.

Why it matters to your plan. The choice between giving an asset now, holding it, or leaving it to heirs has tax effects. For giving, appreciated stock given to a charity has its own rules. Talk with your CPA. See our giving appreciated stock guide.