What The Potential Elimination Of Step-Up In Basis Means

Cody Barbo, cofounder of Trust & Will. Our mission is to make estate planning inclusive, accessible and affordable for all.

Estate planning has long been about building and preserving wealth, minimizing taxes and smoothly transferring assets across generations. With the new administration in office, discussions around potentially eliminating the step-up in basis are gaining momentum. While this is by no means a sure thing, getting rid of the step-up in basis would bring challenges for families looking to pass down assets.

The step-up in basis has historically served as a critical tool for protecting middle-class families from excessive tax burdens when transferring wealth. Its elimination would disproportionately impact hardworking Americans who have spent years building generational wealth, making it harder for them to pass down assets without severe financial consequences.

What Is Step-Up In Basis, And How Does It Work?

Step-up in basis is a tax provision that adjusts the value of an inherited asset to its fair market value at the time of the original owner’s death. This means that if a parent bought a home for $100,000 decades ago, and it’s worth $1 million at the time of their passing, their heirs would inherit it at the stepped-up value of $1 million. If they sell the property immediately, they owe little to no capital gains tax.

Without the step-up in basis, heirs would instead inherit the original purchase price as their basis. If they sell the asset for $1 million, they could be responsible for capital gains taxes on $900,000 of appreciation—a massive tax bill that could force them to sell inherited properties just to cover taxes. For some families, this could mean losing a home that has been in their family for generations.

Who Would Be Affected If The Step-Up In Basis Were Eliminated?

If the step-up in basis were eliminated, the implications would be felt across all income levels, but particularly among middle-class families who inherit property, small businesses or stock investments.

For Those Passing Down Property: Many families have spent decades building wealth through real estate. Without the step-up in basis, inheriting a home could come with a significant tax burden, making it harder to keep property in the family and diminishing opportunities for generational wealth building.

For Those Inheriting Property: Beneficiaries who were counting on keeping a family home or rental property may need to sell assets just to cover tax obligations. This could have a devastating effect on working-class families who lack the liquidity to absorb large tax bills.

For Small-Business Owners: Many family-owned businesses rely on step-up in basis to pass on ownership without triggering an immediate capital gains tax liability. Eliminating it could create a liquidity crisis for heirs who want to continue running the business, potentially forcing them to sell or shut down operations.

How Can Families Pivot Their Estate Planning Strategies?

Estate planning is about adaptability, and if step-up in basis were eliminated, families would need to rethink their strategies. Here are a few key approaches:

1. Leveraging Trust Structures

A well-designed trust, such as a revocable living trust, can help mitigate tax burdens and ensure a smoother transfer of wealth. Irrevocable trusts, in particular, may help manage capital gains exposure if structured correctly.

2. Gifting Strategies

Families might consider transferring assets while they are still alive to lock in current tax rules and take advantage of the annual gift tax exclusion ($19,000 per recipient in 2025). This can help reduce potential tax burdens for heirs.

3. Tax-Efficient Investing

Using tax-advantaged accounts such as Roth IRAs, 529 plans or insurance-based strategies can help shield assets from heavy taxation when passed down to future generations.

4. Charitable Giving And Donor-Advised Funds

For families with philanthropic goals, donating appreciated assets to charities or donor-advised funds can eliminate capital gains taxes while supporting meaningful causes.

5. Life Insurance As A Tax Planning Tool

Life insurance proceeds are generally tax-free and can provide heirs with the liquidity they need to cover any new tax obligations.

The Key To Protection: Proactive Estate Planning

Regardless of political shifts, one thing remains constant: the need for proactive estate planning. The potential elimination of step-up in basis could impact countless American families’ finances, particularly those striving to build and maintain generational wealth.

Now is the time for families to revisit their estate plans and consult with estate planning professionals to prepare for any tax law changes. Without proper planning, middle-class families risk losing assets that took decades to build, all due to an avoidable tax burden.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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