What does "basis step-up" refer to at death?

"Basis step-up" refers to the adjustment of the tax basis of inherited assets to their fair market value on the date of death of the decedent. This is a critical concept in tax planning because it can result in significant tax savings for heirs or beneficiaries.

When an individual inherits assets, the heirs receive a new tax basis that reflects the fair market value at the time of the decedent's death, rather than the original purchase price (also known as the carryover basis). This means that if the inherited asset is sold shortly after the decedent's death, the capital gains tax owed may be minimal or even zero, since any increase in value that occurred during the decedent's ownership is effectively wiped out for tax purposes.

This mechanism is particularly favorable because it prevents heirs from being taxed on gains that accrued during the life of the decedent, thus serving as a tax relief benefit for those who inherit assets. Understanding the basis step-up is essential for effective estate and tax planning, allowing beneficiaries to minimize the tax implications of an inherited estate.