Imagine spending your life building wealth, investing in real estate, stocks, or your business, with the hope of leaving a legacy for your children. Then one day, you find yourself wondering: Will the government take a massive chunk of it anyway?

If your estate is well above the federal estate tax exemption threshold — $30 million for a married couple in 2026 under the OBBBA — you might be asking a very legitimate question:

“What’s the point of the step-up in basis if my estate still owes millions in estate taxes?”

Conversely, if your estate is well below the federal estate tax exemption threshold, you might also ask the more common question:

“What’s the benefit of the step-up in basis if I won’t be paying the death tax anyway?”

Because I’m not dead yet, I haven’t been focused too much on the estate tax owed upon death. However, like any good pre-mortem planner who thinks in two timelines, it’s important to clarify the confusion and plan accordingly.

Let’s walk through how it all actually works. I’ll explain it with three examples, so you’ll walk away understanding why the step-up in basis still matters and why estate tax planning becomes critical the wealthier you get.

The Basics: Step-Up in Basis vs Estate Tax

The key to understanding how the step-up in basis helps, regardless of your estate’s value is knowing there are two completely different taxes in play when someone dies:

1. Estate Tax – a tax on the total value of your assets at death, if your estate exceeds the federal exemption. This tax is paid by the estate.

2. Capital Gains Tax – a tax on the appreciation of assets, but only if those assets are sold. This tax is paid by your heirs.

When someone dies, their heirs get a step-up in cost basis on inherited assets. That means the asset’s cost basis is reset to the fair market value (FMV) on the date of death. The capital gains from the decedent’s lifetime are essentially wiped out.

If you’re looking for a financial reason to hold onto your stocks, real estate, and other assets indefinitely, the step-up in cost basis is a compelling one. Instead of selling your assets, do what billionaires do, and borrow against them.

I used to think it was wasteful for investors to never sell and enjoy a better life along the way. But it turns out, never selling might be the greatest gift you could leave your adult children.

Step-up In Basis vs Estate Tax Example 1: A $50 Million House

To help us better understand how the step-up in basis and the estate tax threshold works, I want to use an extreme example. Thinking in extremes helps you understand anything better.

Let’s say you and your spouse own a single house worth $50 million. You bought it decades ago for $1 million, and it’s now your primary residence. You both pass away, and your two children inherit the property.

Capital Gains Tax:

Normally, if your children sold that house with a $49 million gain, they’d owe capital gains tax — around 20% federal plus 3.8% net investment income tax. That’s over $11 million in taxes.

But because of the step-up in basis, the cost basis resets to $50 million. If they sell the house for $50 million the day after your death, they owe zero capital gains tax. Hooray for a tax-free generational wealth transfer—just for having the good fortune of being born to a rich bank of mom and dad!

Well, not quite.

Estate Tax:

But you’re not off the hook entirely. Because your estate is worth $50 million (you have no other assets but the $50 million house) and the federal estate tax exemption for a married couple is $27.98 million in 2025, the taxable estate is $22.02 million.

At a 40% tax rate, that’s a $8.8 million estate tax bill. Ouch.

And here’s the key point: the estate tax comes first. It has to be paid before the heirs get the property — and it’s paid out of the estate itself.

So the executor (perhaps your children) either:

• Have to sell part or all of the house to pay the estate tax, or
• Use other liquid assets in the estate (if any) or borrow against the house
• Borrow Against the Property (Estate Takes Out a Loan)
• Use Life Insurance (Irrevocable life insurance trusts)
• File a 6-month extension with the IRS and ask to pay in installments

If you know you have a large, illiquid estate, you must plan ahead to figure out how to pay the estate tax.

So What’s the Point of the Step-Up?

At first glance, this seems discouraging. You still owe tax, so what did the step-up even save you?

Here’s the thing: Without the step-up, the tax bill is much worse.

Imagine the same scenario, but there was no step-up in basis. The kids inherit your $50M house with a $1M cost basis. Now the total taxes owed are:

• Estate tax: $8.8 million

• Capital gains tax (if they sell): 23.8% of $49 million = ~$11.7 million

Total tax: $20.5 million

That’s 40% of the value of the estate gone to the government. With the step-up in basis, that total tax burden drops to just the $8.8 million estate tax from $20.5 million.

In other words, the step-up in cost basis prevents double taxation. It doesn’t make estate tax go away — but it shields your heirs from also having to pay capital gains tax on the same appreciated value.

Step-up In Basis vs Estate Tax Example 2: A $40 Million Stock Portfolio

Let’s say your net worth is in tech stocks you bought in the early 2000s. Maybe you got into Amazon at $50 a share or invested in a portfolio of private AI companies. Your portfolio’s now worth $40 million, and your cost basis is only $2 million.

When you pass away:

• Your heirs receive the stock at a stepped-up basis of $40 million

• If they sell right away, they owe no capital gains tax

• But if your total estate (including other assets) exceeds the exemption, they’ll still face estate tax on the amount over the threshold

Let’s say your estate is $45 million, and you’re married. With a $25 million exemption at the time of death, the taxable estate is $20 million, equaling an estate tax of $8 million.

Again, the step-up doesn’t save you from the estate tax, but it saves your heirs from owing capital gains tax on $38 million in gains, which would have been another $9 million or so.

Step-Up in Basis Example 3: A $4 Million Rental Property

Let’s say you bought a rental property 30 years ago for $400,000. Over time, its value has appreciated to $4 million, and it’s now fully paid off. You have no mortgage, and your total estate—including this property, some retirement savings, and other assets—is worth $5 million.

Since the federal estate tax exemption for an individual is $13.99 million in 2025 (or $27.98 million for a married couple), your estate is well below the taxable threshold. That means no estate tax is due—your heirs get everything without the estate owing a penny to the IRS.

But here’s where the step-up in basis makes a massive difference:

Capital Gains Tax Without the Step-Up:

If you gifted the property to your child while alive, they’d inherit your original $400,000 basis, not the $4 million fair market value. If they later sold it for $4 million, they’d owe capital gains tax on $3.6 million of gains — likely over $850,000 in taxes, depending on their income and state.

On the other hand, if you hold the property until your death, then your heirs get a step-up in basis to the fair market value on your date of death — in this case, $4 million. If they sell right away, no capital gains tax is due.

So ironically, doing nothing and holding onto the property until death is often the most tax-efficient strategy. So perhaps your boomer parents aren’t so greedy after all for not helping you more while alive.

Capital Gains Tax With the Step-Up:

But if you hold the property until death, the basis is stepped up to the $4 million fair market value. Your heirs can then sell it for $4 million the day after inheriting it and owe zero capital gains tax.

Who Pays What Tax?

• Estate tax is paid by the estate, if owed, before assets are distributed.
• Capital gains tax is only paid by the heirs if they sell the asset and only if there’s a gain beyond the stepped-up basis.

In this third example, because the estate is below the exemption limit and your heirs sell right after inheriting, neither the estate nor the heirs pay any tax. Hooray for not being rich enough to pay even more taxes!

The Step-Up Is a Gift — But It’s Not a Shield

Think of the step-up in basis as a forgiveness of capital gains tax, but not a full pardon from all taxes.

You’re still subject to the estate tax if your assets exceed the exemption. But the step-up can make a huge difference in the after-tax inheritance your children receive.

For high-net-worth families, the step-up is essential to prevent what could otherwise become a 60%+ combined tax burden.

Even if you don’t expect your estate to be large enough to trigger estate tax, the step-up in basis can still save your heirs hundreds of thousands to millions of dollars in capital gains taxes.

The step-up is one of the most powerful estate planning tools available — and a compelling reason to hold onto appreciated assets until death, especially if your goal is to maximize what you pass on.

Actions You Can Take To Reduce Your Estate Tax

If your estate is well above the federal exemption — especially if most of your wealth is tied up in a single asset like a business, property, or concentrated stock position — you need to plan ahead. Some strategies include:

1. Grantor Retained Annuity Trust (GRAT)

Move appreciating assets out of your estate into trusts, like a Grantor Retained Annuity Trust (GRAT) or Intentionally Defective Grantor Trust (IDGT). These remove future appreciation from your taxable estate.

Example: Put $1M of rapidly appreciating assets (like stocks or real estate) into a short-term, 2-year GRAT. You get annuity payments back, and the future appreciation passes to heirs gift-tax free.

• Transfer $2M into a 2-year GRAT
• Receive $1M/year back in annuities
• Asset appreciates 8% annually
• After 2 years, excess growth goes to heirs estate-tax free

A Revocable Living Trust Doesn’t Reduce Your Taxes

For those wondering whether putting your assets in a revocable living trust can help you save on estate taxes or capital gains taxes — it doesn’t. A revocable living trust is primarily a tool for avoiding probate, maintaining privacy, and streamlining the distribution of your assets after death.

While it does ensure your heirs receive the step-up in basis on appreciated assets (since the trust is still considered part of your estate), it does not reduce your estate’s value for estate tax purposes. The IRS treats assets in a revocable trust as if you still own them outright.

In other words, the trust helps with logistics and efficiency — not with reducing your tax bill. If your goal is to lower your estate taxes, you’ll need to explore other strategies, such as lifetime gifting, irrevocable trusts, or charitable giving, which actually remove assets from your taxable estate.

2. Annual Gifting

You and your spouse can give up to $19,000 (2025) per person, per year to anyone without reducing your lifetime exemption. The annual gift limit tends to go up every year to account for inflation.

Example: you and your spouse have 2 children and 4 grandchildren. That’s 6 people × $19,000 × 2 spouses = $228,000/year.

Over 10 years:

• $228,000 × 10 = $2.28 million removed from your estate

• These gifts also shift appreciation out of your estate, compounding the benefit

If your estate is well below the estate tax exemption amount, annual gifting won’t make a difference for estate tax reduction purposes. You’ve just decided to help your children or others now, rather than after you’re dead.

Further, you’re free to give more than the gift tax limit a year if you wish. Technically, you’re supposed to file Form 709 if you do, but I don’t think it matters if you’re way below the estate tax threshold.

3. Charitable Giving

Donating part of your estate to a charity can reduce your taxable estate and support causes you care about. Charitable remainder trusts can provide income for you and a benefit for your heirs, while reducing the tax burden.

Example: You set up a Donor Advised Fund and donate $100,000 a year to your children’s private school for 10 years. Not only do you help your school, you reduce your taxable estate by $1,000,000 and get a board seat. In turn, your children get a leg up in getting into the best high school and colleges.

4. Buy Life Insurance in an ILIT

Life insurance held inside an Irrevocable Life Insurance Trust (ILIT) can provide your heirs with liquidity to pay estate taxes — without the proceeds being taxed as part of your estate.

Example: Buy a $3 million life insurance policy inside an ILIT. The trust owns the policy and receives the payout tax-free when you die.

That $3 million death benefit can be used by your heirs to pay estate taxes, so they don’t have to sell assets.

Pro: Provides tax-free liquidity.

Con: You must give up control of the policy (but can fund premiums via gifting).

5. Charitable Remainder Trust (CRT)

Place appreciated assets into a CRT. You receive income for life, and when you die, the remainder goes to charity. You get a partial estate tax deduction now.

Example:

• Donate $5M appreciated stock
• You receive $200K/year income
• Get a charitable deduction today (~$1.5–2M)
• Avoid capital gains on sale of stock inside the trust
• Reduces taxable estate by $5M

Pro: Gives you income, avoids capital gains, helps charity

Con: Your heirs don’t receive the donated asset

6. Family Limited Partnership (FLP)

Put assets into an FLP and gift minority interests to family members. Because these interests lack control and marketability, the IRS allows you to discount their value by 20–35%.

Example:

• Move $20M into an FLP
• Gift 40% interest to heirs
• With a 30% discount, value is reported as $5.6M, not $8M
• Reduces reported estate value significantly

Pro: Keeps control while reducing taxable estate

Con: IRS scrutinizes discounts — must be done carefully

7. Relocate To A Lower Tax State Or Country

Finally, you may want to consider relocating to a state with no state estate or inheritance tax before you die. There are over 30 such states. If you can successfully establish residency, your estate—and ultimately your heirs—could save millions of dollars in taxes.

Now, if you’re a multi-millionaire thinking about moving to another country to avoid estate taxes, keep in mind: there’s no escaping the federal estate tax if your estate exceeds the exemption threshold. Even if you’ve lived abroad for decades, as long as you’re a U.S. citizen, your entire worldwide estate remains subject to U.S. federal estate tax upon your death.

However, if you officially renounce your U.S. citizenship, the rules change. You’ll no longer owe U.S. estate tax on non-U.S. assets—only on U.S.-situs assets like real estate and U.S. stocks. But there’s a catch: if your net worth exceeds $2 million, or if you can’t certify five years of U.S. tax compliance, you’ll be classified as a “covered expatriate” and may be subject to an exit tax under IRC Section 877A.

This exit tax treats all your worldwide assets as if they were sold the day before you renounce, taxing any unrealized gains above a certain exemption.

Final Thoughts: The Step-Up in Basis Helps A Lot

If your estate is under the federal exemption, the step-up in basis remains a powerful tool that lets your heirs inherit appreciated assets tax-free. By holding onto your wealth until death, your heirs receive a stepped-up cost basis and can avoid capital gains taxes if they sell. In contrast, if you gift appreciated assets during your lifetime, the recipient inherits your original cost basis, potentially triggering significant capital gains taxes upon sale.

Once your estate exceeds the exemption threshold, the federal estate tax kicks in. Without proper planning, your heirs may even be forced to sell valuable assets just to cover the tax bill. The step-up helps, but it’s not a substitute for a thoughtful estate plan. Strategies like GRATs, ILITs, and charitable trusts can dramatically reduce or even eliminate your estate tax liability, but only if you start planning early.

Also keep in mind: not all assets get a step-up in basis. Pre-tax retirement accounts like IRAs and 401(k)s don’t qualify. Instead, your heirs will owe ordinary income tax when they withdraw the money—not capital gains.

Your best move? Talk to an experienced estate planning attorney. We have, and it made a world of difference for our peace of mind. The step-up may save your heirs from one tax, but the IRS is still waiting with another.

Readers, are you now less upset about your wealthy parents holding onto their assets instead of gifting them to you while they’re still alive—thanks to the step-up in cost basis? Does it make more sense for more of us to hold onto appreciated assets until death and borrow against them if needed, rather than sell and trigger capital gains taxes?

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Diversify Your Retirement Investments

Stocks and bonds are classic staples for retirement investing. However, I also suggest diversifying into real estate—an investment that combines the income stability of bonds with greater upside potential.

Consider Fundrise, a platform that allows you to 100% passively invest in residential and industrial real estate. With over $3 billion in private real estate assets under management, Fundrise focuses on properties in the Sunbelt region, where valuations are lower, and yields tend to be higher. As the Federal Reserve embarks on a multi-year interest rate cut cycle, real estate demand is poised to grow in the coming years.

In addition, you can invest in Fundrise Venture if you want exposure to private AI companies like OpenAI, Anthropic, Anduril, and Databricks. AI is set to revolutionize the labor market, eliminate jobs, and significantly boost productivity. We’re still in the early stages of the AI revolution, and I want to ensure I have enough exposure—not just for myself, but for my children’s future as well.

I’ve personally invested over $400,000 with Fundrise, and they’ve been a trusted partner and long-time sponsor of Financial Samurai. With a $10 investment minimum, diversifying your portfolio has never been easier.

To increase your chances of achieving financial independence, join 60,000+ readers and subscribe to my free Financial Samurai newsletter here. Financial Samurai began in 2009 and is the leading independently-owned personal finance site today. Everything is written based off firsthand experience. 

AI search engine startup Perplexity internally mandated the use of AI coding tools — and says that its engineers have been noticeably more productive.

Perplexity CEO Aravind Srinivas told Y Combinator that the startup “made it compulsory” for its engineers to use AI coding tools such as Cursor or GitHub Copilot. These tools can generate blocks of code and debug programs.

Related: AI Is Already Writing About 30% of Code at Microsoft and Google. Here’s What It Means for Software Engineers.

Srinivas said that Perplexity engineers have seen measurable outcomes so far: Using the tools cuts down on “experimentation time” for new tasks from “three, four days to literally one hour,” he said.

“That level of change is incredible,” Srinivas stated. “The speed at which we can fix bugs and ship to production is crazy.”

Perplexity’s AI search engine reported a 20% month-over-month growth in May with 780 million queries.

^{Perplexity CEO Aravind Srinivas. Photographer: David Paul Morris/Bloomberg via Getty Images}

Related: Google’s CEO Is Spending His Free Time ‘Vibe Coding’ a Webpage with AI: ‘I’ve Just Been Messing Around’

At Bloomberg’s Tech Summit in May, Srinivas predicted that within a year, Perplexity would be handling “a billion queries a week.” He pointed out that when the AI search engine first got started in 2022, it processed 3,000 queries a day, advancing to 30 million queries a day by May.

“It’s been phenomenal growth,” Srinivas stated at the event.

Still, there “are issues,” Srinivas said about using AI coding assistants, noting that the tools can introduce new bugs that software engineers aren’t familiar with and don’t know how to fix.

Last week, Perplexity introduced Comet, an AI-powered web browser that takes on Google Search and Google Chrome. Comet uses Perplexity’s AI search engine as its default tool, putting the company’s core product front and center for users.

In May, Perplexity was reportedly in late-stage talks for a $500 million funding round that would value the company at $14 billion.

Related: ‘Building It Ourselves’: Morgan Stanley Created an AI Tool to Fix the Most Annoying Part of Coding. Here’s How It Works.

Join top CEOs, founders and operators at the Level Up conference to unlock strategies for scaling your business, boosting revenue and building sustainable success.

Angie Snow was a teacher and mom of three young children when her husband suggested buying an HVAC company together. Assuming she’d be playing a background role, she agreed.

“I thought, Oh good, I can get out of the classroom, be at home. This will be a piece of cake! I just have to answer the phone and send out invoices, right? No big deal,” she says.

But what started as a small step into the trades industry quickly turned into a much bigger leap. Over the past 18 years, Snow and her husband grew Western Heating and Air Conditioning more than they ever could have imagined. Now an industry advisor, Snow also teaches business owners how to succeed with ServiceTitan, a leading home services software company.

“I thought teaching was for me, but it’s been fun as I’ve built my business and been able to help other contractors along the way,” she says. “I’ve been able to slide back into that teaching seat, just in a different role.”

Snow’s transition into the trades wasn’t always easy. As a woman stepping into a leadership role in a male-dominated industry, she struggled with impostor syndrome and finding her footing. Everything changed when she found community through Women in HVACR, an organization that promotes education, mentorship and support for women in the industry.

“I was like, ‘I found my people,'” Snow says.

Related: He Went From Customer to CEO of a Rapidly-Expanding Dessert Chain By Following This Process

That moment sparked a deeper passion. Snow later served on the group’s advisory board for six years and got involved with groups like Women in Plumbing and Piping and National Women in Roofing. “It’s just so cool to see these organizations exist to support women, where a lot of times we just haven’t felt or seen that in the trades,” she says.

Building a place in the trades where everyone can feel seen and supported became Snow’s goal, and part of her leadership philosophy centers on creating a workplace with a strong internal culture.

“Number one, you have to work on your leadership and always evolve as a leader — connecting with your people, helping your people feel like they matter and having a vision for them to look at and to follow. The foundational work has to be in place,” she says. “They have to know that you care and you’re a company and a brand worth working for.”

One of the biggest hurdles today is attracting younger workers to the trades. Snow says it’s not just about better recruiting, but rather about changing outdated perceptions of the industry.

“Something we’re doing at ServiceTitan to change that stigma is to show how home service companies are really the heroes,” she says. “They’re the ones showing up. You will have steady work, and these people are the heroes.”

The Covid-19 pandemic helped prove that point. While other industries slowed down, essential home services stayed strong. “It brought a new light to how important the trades are and why we are so needed,” Snow says.

Related: He Started a Business and Ended Up on the Brink of Bankruptcy. He Fixed His Mistakes – and Now Teaches Entrepreneurs What He Wishes He Knew When Starting Out.

Still, employee retention and morale require more than job security. Snow recognized that many employees, especially Gen Z workers, care deeply about balance and flexibility, which are things that don’t always come naturally in a demanding industry like home services.

“That generation really values work-life balance. They value having time with their family and time off when they want it,” Snow says. “We’re a 24/7 industry, but to help them, I show that I care about them and honor that work-life balance. Because that’s what I want in my life too.”

True to her word, she reworked the team’s schedule into four-day workweeks, which resulted in more engaged workers who take pride in each job.

Technology has also been a huge part of helping Snow deliver a high-level experience. Since switching to ServiceTitan in 2018, Western Heating and Air Conditioning has seen improvements in efficiency. Snow says artificial intelligence is further transforming the game. “It is just crazy how AI can analyze and do so many things so much faster,” she says.

With AI tools, her team can automate dispatching, consolidate contacts, track sales calls and even help technicians perform better during service visits. It’s a win-win: Smarter systems empower her people to focus on serving customers.

Looking back, Snow never imagined where this journey would take her. But she hopes others, especially women and young people, realize the trades offer much more than people assume.

Related: Her Show Was Canceled – But the Setback Taught Busy Philipps a Powerful Lesson for Creators and Entrepreneurs

“There is a path for everyone in the trades, and there is so much opportunity [and] money to be made,” she says. “It’s a very nice industry that way, and it is a service that people need. I would definitely consider finding your own unique genius in where you shine and finding a path in the trades, because it won’t let you down. You’ll be surprised.”

After nearly two decades growing a successful HVAC company and helping shape the future of the trade industry, Snow’s advice to current and future business leaders is clear:

• Lead with people in mind. Whether it’s your technicians or customers, building a business rooted in care, connection and trust sets the foundation for long-term success.
• Create an employee experience worth staying for. From flexible schedules to a culture of belonging, investing in your team elevates every part of your business.
• Embrace innovation early. Tools like AI and integrated software platforms don’t just boost efficiency — they also free your team to focus on what matters most: serving customers.
• Redefine what leadership looks like. There’s space in the trades for every kind of strength and every kind of leader.
• If there’s an open door, walk through it. The trades are full of hidden opportunities. Whether you start in the field, the office or by someone else’s side, you might be surprised where you end up.

Watch the episode above to hear directly from Angie Snow, and subscribe to Behind the Review for more from new business owners and reviewers every Tuesday.

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