Step-Up Basis vs. Lifetime Gifting

Should you give the appreciated stock to your kids now, or hold it and let them inherit it? Most people’s instinct is to give it now, and for a family under the estate tax line that instinct is usually wrong. The difference between the two paths can be a six-figure tax bill that nobody had to pay.

The two paths, and why they diverge

Say you bought a stock decades ago for $100,000 and it’s worth $1,100,000 today. That’s a $1,000,000 built-in gain.

Give it during your life and your child takes your cost basis with it. This is called carryover basis: they inherit the $100,000 number. Sell the next day and they owe capital gains tax on the full $1,000,000 gain.

Hold it until you die and your heirs get a step-up in basis, meaning the cost basis resets to the asset’s value on your date of death. The basis jumps to $1,100,000. They sell, and the gain that built up over your whole lifetime simply disappears. At a 20% top federal capital gains rate, that’s up to $200,000 of tax erased by doing nothing but waiting.

That’s the whole tension. Gifting moves the asset out of your estate but drags the gain along. Dying transfers it with the gain washed clean.

Why “get it out of my estate” is often the wrong reflex

For years the goal was to shrink your taxable estate, so giving assets away felt like pure progress. Then the One Big Beautiful Bill Act set the federal estate and gift exemption at $15,000,000 per person for 2026, $30,000,000 for a couple, and made it permanent and indexed from 2027.

Run the logic. If your estate is comfortably under that shield, the federal estate tax will never touch you. So gifting an appreciated asset to “save estate tax” saves a tax you don’t owe, while creating a capital gains tax your heirs do owe. You traded a phantom bill for a real one. I watch smart people do this all the time, so locked onto one tax they march straight into another.

When gifting still wins

Holding for the step-up is the default, not a religion. Lifetime gifting earns its keep in specific cases:

• Your estate clears the federal exemption. Above $15M single or $30M married, getting fast-growing assets out, with their future appreciation, can beat the lost step-up. Gift the asset poised to 10x, not the one sitting on a huge gain you’d rather wash at death.
• You face a state estate tax. New York taxes estates above roughly $7,350,000 for 2026, far below the federal line, with a cliff that taxes the whole estate once you cross it. A New York family can owe nothing federally and a real bill to Albany, which changes the gift-versus-hold call. See state residency change planning.
• The asset has little built-in gain. If basis is close to current value, there’s almost no step-up to give up, so gifting costs you nothing on that front.
• You want the income or the growth in younger hands now. Gifting appreciated stock to a child in a low bracket, or to charity, can shift the eventual tax to someone who’ll pay less, or none.

How to decide

Three questions settle most of it.

• Will your estate ever realistically cross $15M single or $30M married, counting growth? If no, lean hard toward holding for the step-up.
• Do you have state estate tax exposure? Price that separately. The federal headline tells you nothing about New York.
• How big is the embedded gain? Big gain plus no estate tax exposure is the textbook hold. Small gain or real estate tax exposure opens the door to gifting.

For the assets that should leave your estate, pair this with annual gifting limits and the right trust. For everything else, the most powerful estate move is often the laziest one: hold the appreciated asset, let the basis step up, and let a lifetime of gains pass to your family tax-free.