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Freedom for Retirement™ is the podcast designed to help you move beyond the fear of the complexity of finances so you can be financially free to achieve personal significance. Tune in with Josh Duncan each week to turn fear into fuel that drives you into Freedom & Significance.
Welcome to the Freedom for Retirement Podcast.
If you're a high-earning professional, business owner, or someone approaching retirement
and wondering whether you are truly on track, you are in the right place.
This podcast is all about helping you make smart, confident financial decisions without
the fear, confusion, or sales pressure that so often comes with money advice.
Each episode is designed to break down complex topics like retirement planning, investing,
taxes, and cash flow in plain English.
So you can understand what really matters and avoid the most common and costly financial
mistakes.
Everything you hear here is educational, fiduciary focused, and grounded in real-world
planning experience working with clients just like you.
I'm your host, Josh Duncan, partner at F5 Financial Planning.
Let's get started.
If you want to help your children or grandchildren, giving them money or stock now while
you are alive to see them use it, feels like the generous thing to do.
And it is generous, but there is a tax rule that changes what your family owes.
And it's not the part many people weigh before they decide.
It's called step up and basis.
I'm Josh Duncan, partnered at F5 Financial Planning, where we take a fiduciary approach to
maximizing our clients' wealth.
Today I'm gonna walk you through what step up and basis is, why the timing of a gift
changes the tax bill your family owes, what happens to jointly owned accounts and trusts
when a spouse dies.
And which accounts this rule does not apply to at all.
Step up in basis is the rule that resets what the IRS considers the cost of an asset the
moment it passes to someone at death.
It applies to the kind of assets many people build wealth with over a lifetime: stock,
real estate, a stake in a closely held business, and similar property.
Take two people who each end up owning the exact same block of stock.
One bought it decades ago for $20,000 and it's now worth
$200,000.
If that person sells it while they are alive, capital gains tax applies to the full
$180,000 of growth.
The other person inherited that identical block of stock the day their parent passed away.
For tax purposes, their cost basis is not $20,000.
It's $200,000, the value on the date of death.
If they sell it the next day, there's no capital gain to tax at all.
The reset.
Is what erases the growth for tax purposes.
The gain your parent would have owed tax on if they had sold the stock themselves
disappears when the asset passes to you at death.
The reset works in both directions.
If an asset has lost value since it was purchased, the basis resets down to that lower
value at death, not up.
An unrealized loss disappears the same way an unrealized gain does, which is why it can
make sense to sell a losing position before death.
Rather than let it pass with no tax benefit at all.
The same principle applies to real estate.
A rental properties cost basis resets too, and that reset also restarts the depreciation
schedule for whoever inherits it.
A common mistake is assuming your heirs will owe income tax on everything an account grew
by during your lifetime.
For a typical taxable brokerage account or a piece of real estate, that is not how it
works.
The growth up to the date of death disappears.
For tax purposes.
That single mechanic resetting the cost basis at death is why the timing of a gift is
worth thinking through carefully.
So should you gift an appreciated asset now or wait?
When you give someone an asset during your lifetime, they do not get a step up.
They get your original cost basis carried over unchanged.
The IRS calls this a carryover basis, and it means the gain you're sitting on becomes
their gain to deal with whenever they eventually sell.
One family gifts appreciated shares to their daughter now while she's young enough to put
them toward a house down payment.
Another family holds the identical shares and lets them pass to their son when they die.
In the first family, the daughter received shares originally bought for $20,000.
Now we're $200,000.
If she sells them to help fund the down payment, capital gains tax applies to that same
$180,000 of growth.
Only now it's her tax bill instead of her parents.
In the second family, the son inherits an identical position.
His cost basis resets to $200,000 the day he inherits it.
If he sells right away, there is no capital gain to tax at all.
Neither family did anything wrong.
The first family paid a real tax cost so their daughter could use the money now while she
needed it and while her parents were there to see her use it.
The second family avoided the tax costs, but their son didn't benefit from those shares
until much later in his life.
This is not a decision with one right answer, and it
It does not have to be all or nothing.
Step up in basis is a real cost away, not a rule that says you should hold everything
until you die.
If part of the reason you're giving is watching the people you love use and enjoy what you
give them while you're still here for it, that reason does not go away just because
there's a tax cost attached.
It's one input into the decision, alongside how much you can afford to give, what your
children need right now, and how appreciated the asset is.
It's also worth remembering that a gift you can't comfortably afford isn't generous.
It's a risk to your own plan.
So this decision has to work within your broader financial picture, too.
In practice, this usually means sorting what you're planning to give.
Cash carries no capital gains question at all, so it's the simplest thing to give now.
An asset that hasn't appreciated much yet has little basis to give up.
It's the highly appreciated long-held positions where the cost of gifting now.
is largest and where it's worth knowing the number before you decide.
Your brokerage statements usually show the cost basis for each position.
So this isn't a guessing game.
A quick look tells you which holdings carry the biggest embedded gain.
For context, in 2026, you can give any one person up to $19,000 without counting against
your lifetime gift and estate exemption at all.
So smaller gifts often don't raise any of these questions in the first place.
A common mistake is going to either extreme.
Giving away every appreciated asset without ever running the numbers or refusing to gift
anything during your lifetime because step up and basis exists.
Both skip the decision itself, which is what you're trying to accomplish by giving in the
first place.
Knowing the tax cause first makes it possible to decide on purpose what you're solving
for.
Okay, so what happens to a step up when an account is jointly owned or held inside a
trust?
When a married couple owns an account jointly and one spouse dies, what resets depends on
where they live.
There are nine community property states, including California and Texas, and in those
states, the entire account can receive a full step up, both the surviving spouse's half
and the half that belong to the spouse who died.
In every other state, only the half that belong to the deceased spouse resets.
The surviving spouse's half keeps its original basis.
Now, two couples can hold an identical joint account worth $400,000 with an original cost
basis of $100,000.
One couple lives in a community property state.
When the first spouse dies, the entire account steps up to $400,000.
The other couple lives outside a community property state.
When their first spouse dies, only half the account, the half that belong to the spouse
who died, gets reset.
The surviving spouse's original basis stays in place on their half.
Trusts add another layer, and this is where I hear the most confusion.
Putting an asset into a trust does not by itself create or remove a step up.
What matters is whether the asset is still considered part of your taxable estate when you
die.
A revocable living trust, the kind many people use for probate planning, still counts as
part of your estate because you keep full control over it during your lifetime.
Assets inside it get the same step up they would even if you own them in your own name.
This means it doesn't matter.
For step-up purposes, whether a married couple owns an account jointly and their own names
are inside a shared revocable trust.
Both are still part of the couple's estate.
So both get the same step up when the first spouse dies.
The trust changes how the account avoids probate.
It does not change the tax math.
Now, an irrevocable trust is different.
Many irrevocable trusts are specifically designed to move your assets out of your taxable
estate, which is what removes them from being eligible for a step up when you die.
The assets keep the basis they had going in, the same carryover rule that applies to a
lifetime gift.
Whether a trust helps or costs you a step up depends entirely on what kind of trust it is
and what it was built to do, which is why this is a conversation to have directly with
your estate planning attorney rather than assume one way or the other.
So, which accounts does the step up in basis rule not apply at all?
Well, retirement accounts are the biggest exception.
An inherited IRA or 401k does not get a step up because the money inside it was never
taxed in the first place.
Every dollar that comes out is still taxed as ordinary income to whoever inherits it, the
same way it would have been taxed if the original owner had withdrawn it.
There's a separate video on this channel that walks through how an inherited IRA works
today, including the 10-year rule, if you want the full picture there.
The other major exception is anything you receive as a gift during someone's lifetime,
which we already covered.
That carries the giver's original basis with it, not stepped up one.
Which account something sits in changes the outcome as much as when it changes hands.
So it's worth knowing both before you decide anything.
So once a step up applies, how do you establish the new basis in practice?
Well, for publicly traded securities, this is usually straightforward.
The brokerage firm records the closing price on the date of death and the cost basis
updates on the account once it's retitled to the new owner.
Real estate, a business interest,
Or anything without a daily quoted price works differently.
Someone needs to get a qualified appraisal as of the date of death, and the appraisal
becomes the new basis going forward.
A common mistake is skipping the appraisal because nothing needs to be sold right away.
Years can pass before an inherited house or a family business interest change hands, and
by then reconstructing what it was worth on a specific day years earlier gets much harder.
I'd encourage you to get the valuation done close to the date of death.
While the records are easy to gather, even without any plan to sell soon, it costs far
less than untangling a dispute over value years later.
And the appraisal or the brokerage record is what turns step up in basis from a rule on
paper into a number you can defend if the IRS ever asks.
So step up in basis resets the cost of an asset to its value on the date someone dies, and
it can erase decades of capital gains for whoever inherits it.
That is a real number worth knowing.
Before you decide when and how to give.
But it's not a reason to hold everything until you're gone.
If part of why you're giving is watching your children or grandchildren use what you give
them while you're still here to see it, that is a completely legitimate reason to give
now, tax cost included.
Which account holds the asset changes this too.
A jointly held account resets differently depending on your state.
A revocable trust carries the same step up you'd get on your own.
And an irrevocable trust or a retirement account often does not get one at all.
And once a step up applies, get it documented, an appraisal, or a brokerage record close
to the date of death so the number holds up if it's ever a question.
None of this has one right answer for every family.
I'd encourage you to work through your own numbers with your financial planner and tax
professional before you decide, so that when you give, you're deciding on purpose.
If you found this episode helpful, please consider subscribing to the podcast and leaving
a review.
It helps more people find the show and continue learning how to make smarter financial
decisions.
I'm Josh Duncan, partnered F5 Financial Planning.
If you would like to learn more about how we help our clients achieve financial freedom
for personal significance, please visit our website at www.f5fp.com.
Thanks for listening, and I'll see you in the next episode.