Stepped-Up Basis in Estate Planning: What Business Owners Need to Know
When planning your estate, understanding how the stepped-up basis works is essential—especially if you own real estate, a business, or investment assets. At Cool Wealth Management in Phoenix, Arizona, we help business owners use tax-efficient estate planning strategies to preserve and transfer wealth. One key concept is the stepped-up basis, which can significantly reduce or even eliminate capital gains taxes for your heirs. If you're not accounting for this rule, you may be missing one of the most powerful tax benefits available under current law.
What Is the Stepped-Up Basis?
The stepped-up basis refers to the readjustment of the value of an appreciated asset for tax purposes upon inheritance. When someone passes away and leaves assets like stocks, real estate, or a business to their heirs, the cost basis of those assets is “stepped up” to the fair market value on the date of death.
For example, if your parent bought a rental property for $200,000 and it’s worth $500,000 when they pass away, your new basis in the property is $500,000. If you then sell it for that amount, you pay no capital gains tax.
Why It Matters in Estate Planning
Without a stepped-up basis, heirs would owe capital gains taxes on the appreciation of assets from the original purchase price. This could result in a massive tax burden. With the step-up, however, much (or all) of that gain is wiped out.
This rule is especially important for:
Real estate investors
Stock and crypto holders
Business owners
Anyone with highly appreciated assets
By understanding and planning around the stepped-up basis, you can transfer more wealth to your loved ones while minimizing taxes.
Business Owners: Special Considerations
If you own a business, the stepped-up basis can apply to ownership shares or the business itself, depending on how it’s structured. That makes choosing the right entity type (LLC, S-Corp, etc.) even more important. Planning ahead ensures that your heirs receive the most benefit and avoid unnecessary taxes when inheriting your business.
You may also want to coordinate with a CPA and estate attorney to document your business’s valuation and ensure your estate plan reflects your intentions.
Common Misconceptions
“I gave my kids the asset before I died, so they’re good.”
Not true. Gifts made during your lifetime do not receive a stepped-up basis. The recipient inherits your original cost basis and could owe substantial capital gains taxes.“The stepped-up basis eliminates estate taxes.”
No. It’s a capital gains strategy, not an estate tax strategy. Both need to be addressed in your plan.“I don’t have enough money for this to matter.”
You’d be surprised. Even modest home or stock appreciation over decades can create a major tax difference.
How to Take Advantage of the Stepped-Up Basis
Hold appreciated assets until death (when possible) rather than gifting during life.
Avoid joint ownership with right of survivorship that bypasses the estate and forfeits the step-up.
Use a revocable living trust to clarify how assets should be distributed.
Keep records of cost basis and asset documentation to simplify estate settlement.
Final Thoughts
Stepped-up basis is one of the most powerful—but underused—tools in estate planning. At Cool Wealth Management, we help business owners in Phoenix and across Arizona create smart estate strategies that preserve wealth across generations. If you want to make the most of your legacy, don’t overlook this rule.
Let’s talk about how to build a tax-smart estate plan that works for your family and your business.
