When people sit down to map out an estate plan, they often have concerns about taxation. Fortunately, there isn’t a whole lot to worry about unless you are very wealthy.
There is a federal estate tax, but it only applies to the portion of an estate that exceeds $15 million for a single person. In addition, inheritances are not subject to regular income taxes with a couple of limited exceptions.
Your appreciated assets also get a “stepped-up basis” when they are transferred after your passing. Understanding how this rule works allows you to structure your assets intentionally to take full advantage of the tax efficiency opportunity.
Capital Gains Taxes
To see the value of a stepped-up basis, you first have to understand how the government calculates taxes on investment growth.
When you buy an asset, the purchase price becomes your tax basis (often called your cost basis). If you sell that asset later during your lifetime, you owe capital gains tax on the profit, which is the difference between the sale price and your original basis.
Consider a practical example. Imagine you bought an investment property in Oklahoma City decades ago for $100,000. Over the years, the local real estate market booms, and today the property is worth $500,000.
- Your original tax basis is $100,000.
- The current fair market value is $500,000.
- If you decide to sell the property yourself today, you will trigger a taxable capital gain of $400,000.
This would be a long-term capital gain because you held the investment for more than a year. The long-term capital gains rate is 15% for most people, and it rises to 20% for filers who claimed over $545,500 (this is the 2026 figure) in taxable income during the year the gain was realized.
How Death Resets the Financial Clock
The stepped-up basis rule changes everything at the moment of your passing. Under federal tax laws, when an heir inherits an appreciated asset upon your death, the original tax basis is re-set
. Instead, the IRS “steps up” the asset’s tax basis to its fair market value on the exact date of your death.
If your children inherit that same $500,000 Oklahoma City home through your estate plan, their new tax basis becomes $500,000.
If they decide to sell the house a month later for that exact amount, the capital gains math looks completely different:
- The new stepped-up basis is $500,000.
- The sale price is $500,000.
- The total taxable profit is $0.
By holding the asset until death and passing it as an inheritance, you completely erase $400,000 of taxable appreciation. Your children can walk away with the full value of the home, completely free of capital gains tax liability.
The Dangerous Mistake of Lifetime Gifting
Because the stepped-up basis is so lucrative, it highlights a common, well-intentioned mistake made by many property owners: signing a deed over to the children during your lifetime.
Many parents assume that signing their home over to their adult children while they are still alive is a clever way to protect the property and avoid probate. From a tax perspective, this move can be a financial disaster.
When you give an asset to someone during your lifetime, you pass along a carryover basis. This means your child inherits your original, low cost basis along with the property.
If you sign over that same $100,000 home to your daughter while you are alive, her tax basis is stuck at $100,000. When she sells it after your passing for $500,000, she will be responsible for paying capital gains tax on the $400,000 profit.
A simple signature on a lifetime gift deed can accidentally cost your children tens of thousands of dollars in unnecessary taxes.
Structuring Your Estate Plan to Lock In the Step-Up
To guarantee your family receives the full advantage of a stepped-up basis, your assets must be held in a structure that qualifies for the adjustment under tax law. The rule generally requires that the asset be included in your taxable estate when you pass away.
Two primary estate planning tools achieve this balance beautifully:
- Simple will: Assets passing through a will qualify for a stepped-up basis, but they must undergo the public, time-consuming Oklahoma probate process before your heirs can claim them and verify the new valuation.
- Revocable living trust: This is generally the most efficient vehicle for basis planning. A revocable living trust allows you to retain complete control over your home and investments during your life. Because the trust is revocable, the assets remain part of your taxable estate for basis purposes, meaning they receive a full step-up at your death. Most importantly, a trust transfers the property to your heirs privately and immediately, completely bypassing the probate court.
Access Our Free Estate Planning Worksheet
Since you are here, you must be looking for information about the things you need to know to pass along your legacy effectively. There’s definitely a lot to learn, this is why we share so much information right here on our site. We encourage you to take advantage of all the information that we have made available to you.
One resource that you can access right now will really provide a foundation so you can see where you stand. We have prepared a very useful worksheet they can go through step-by-step, and it is available free of charge. To gain access, visit our worksheet page and follow the simple instructions.
Need Help Now?
Learning is important, but at some point, action is required. If you are ready to take the final step, we are here to help.
When you work with our firm, your plan will be carefully tailored to meet your specific needs. As time goes on, we will always be available to help you make adjustments if and when they become necessary.
To get started, call our Oklahoma City estate planning office at 405-843-6100. Our Tulsa location can be reached at 918-615-2700, and you can use our contact form to send a message to either location.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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