Somewhere in the pile of paperwork is a brokerage statement, and on it are positions the two of you have held for decades. You may already know the reason they were never sold. Every time it came up, the answer was the taxes. The gain had grown so large that selling felt like handing a season of your life to the IRS, so the shares just stayed.
Here is the part almost no one tells a survivor. On the day your spouse died, much of that tax quietly went away.
The rule is called a step-up in basis, and it is one of the few parts of the tax code that works in your favor at the worst possible time. This is what it does, where it stops, and why it matters most in the first year or two, when everyone is telling you not to touch anything.
What resets, and why the old gain disappears
Your basis in an investment is roughly what was paid for it. Sell for more than that, and the difference is a taxable gain. When someone dies, the assets they leave behind do not carry their old basis to the person who inherits them. The basis resets to what the asset was worth on the date of death.1
On everything that resets, the gain that built up before that day is not deferred or spread out. It is simply never taxed, not to your spouse, and not to you.
Take a stock position the two of you bought long ago for $50,000, worth $400,000 now. Sold a month before a death, that is a $350,000 gain with tax due on all of it. Inherited instead, the basis resets toward $400,000, and a sale at that price produces little or no taxable gain at all. Same shares, same price, a very different tax bill. That is the whole mechanism, and it applies to most of what passes at death: stocks, funds, the house, the business.1
In Illinois, joint property resets by half
The most common situation is also the one with a wrinkle. If the two of you held an account or the house jointly, as most married couples do, only your spouse's half resets.2
Run the same numbers. The $400,000 joint account with a $50,000 cost: your half keeps its old basis of $25,000, and your spouse's half resets to $200,000, its share of the date-of-death value. Your new basis is $225,000. Sell it all soon after, and the taxable gain is about $175,000 instead of $350,000. Half the gain is forgiven, half remains.
A note on the nine community property states, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin: there, both halves of community property generally reset, even the survivor's own half.3 Couples who once lived in one of those states and kept property from that time may have more forgiveness available than they realize. It is worth mentioning to whoever prepares the estate paperwork.
One narrow exception runs the other way. Property you gave your spouse within a year of their death, which then comes back to you, keeps its old basis. The code does not reward a deathbed handoff.2
What does not reset
The step-up applies to property, not to income that was always going to be taxed. So the accounts that were never taxed on the way in do not reset on the way out. A traditional IRA, a 401(k), the deferred gain inside an annuity: every dollar you draw from these is taxed as ordinary income to whoever inherits them, exactly as it would have been.4 If most of your money sits in retirement accounts, the step-up will do less for you, and the planning weight shifts to how those accounts are drawn down, which is its own subject.
There is also a quieter trap. In 2023 the IRS confirmed that assets sitting in certain irrevocable trusts, the kind designed to keep assets out of the taxable estate, do not get a step-up when the person who created the trust dies.5 The same structure that saved estate tax can cost the step-up. If the two of you set up trusts along the way, this is worth one direct question to the attorney who drafted them: which of our assets will reset, and which will not.
What the step-up actually buys you: time
We have written elsewhere that in the first year, almost nothing needs you quickly, and that the costly mistakes are the big permanent decisions made early. The step-up is the tax code underwriting that advice.
A survivor is often holding a portfolio shaped by someone else's choices. A concentrated stock position that was really your spouse's conviction. A rental property you never wanted to manage. For years, the tax was the reason not to touch any of it. Right after a death, that reason is mostly gone. The positions can be simplified, gently and without hurry, at little or no tax cost, because the gain has already been forgiven and little new gain has grown on top of it.1
There is one real clock, and it belongs to the house. A surviving spouse who sells the home within about two years of the death can still use the full $500,000 exclusion on the gain; after that it drops to $250,000.6 Two years is not a reason to hurry. It is a reason to decide about the house on purpose rather than by default. We walk through that clock, and the rest of the survivor's tax picture, in the widow's penalty.
The one task worth doing early
Everything above depends on a single number: what each asset was worth on the date of death. For brokerage accounts, the custodian can usually set the new basis if you ask, and it is worth confirming in writing that they have. For the house, and for anything without a daily price, business interests, land, collections, the number comes from an appraisal, and an appraisal is far easier to get now than to reconstruct years later when you sell.1
So the practical to-do list is short, and none of it is urgent in the first weeks. Ask each custodian to confirm the stepped-up basis in writing. Order a date-of-death appraisal for the house and anything else without a printed price. Put both in the folder. An executor filing an estate tax return can in some cases elect a value set six months after the death instead, which is a question for whoever handles the estate, not a decision you need to make alone.1
If the gains in your accounts were modest, the step-up is real but small, and nothing here should keep you up at night. It matters most for long-held, concentrated positions and for property that has quietly tripled. The closer that sounds to your statement, the more this one piece of the tax code is doing for you, and the less the taxes should factor into what you keep and what you finally let go.
Where we fit in. We integrate tax considerations into your investment strategy and collaborate with estate attorneys and CPAs to ensure your plan is coordinated. We are not a law firm or accounting firm, so we do not provide legal or tax advice. Everything in this material is for educational purposes, based on primary sources. Before taking any action, please consult the appropriate professionals to apply these ideas to your situation.
We wrote separately about what needs you in the first year, and when, and about the tax return you will file alone. When you are ready, there is a time to talk on our schedule page.
