Video Transcript
The current estate tax exemption, in 2026 is $13.6 million per person, or $27 million for a couple, and as a result, 99.9% of us are not paying much of any taxes when somebody passes away. In fact, when somebody passes away for most of us, 99% of us, dying is the great tax eliminator.
And the way that works is because we're not paying an estate tax when we inherit an asset from our parents or anybody, or even a surviving spouse, we get what's called a step up in basis in that asset. The basis is what the IRS considers somebody paid for something. For example, if I own a stock I paid $100 for it, it's now worth $300. If I sell that stock while I'm alive, I pay a capital gains tax on the $200 profit. The basis is 100, I sold it for 300, I made a $200 profit, I pay a capital gains tax on that profit.
However, when somebody passes away, and even in California, if in a married couple, if even one spouse passes away, the surviving spouse or the surviving heirs, when they receive that asset, they get what's called a step up in basis. In other words, the basis goes up from whatever it was when that person paid for it to full market value. So in this example I gave with the stock, if $100 was paid for the stock, but it's worth $300 when once somebody passes away, the person who inherits that asset, whether it be the spouse or the children as an example, their new basis in the stock is now $300. The basis is stepped up from 100 to 300, which means if they sell that stock for $300, they pay zero capital gains tax.
And so that's why dying and, you know, holding assets, especially appreciated assets until you pass away, is the ultimate tax strategy because the basis gets stepped up, and whoever, whenever that person sells that stock, the new basis will be the higher value, typically, in which case they will pay little or no capital gains tax. Now, if that property continues to go up in value, then yes, they'll pay a capital gains tax on the increased value, but only from the new level.
Now, when you have a married couple and one spouse passes, and let's say they hold on, let's say that again, that same stock, it went from 100 to 300, and now that spouse is held on to that stock, and when the second spouse passes, it's now worth 500, and that asset now passes on to the kids, they get another step up, what we call the double step up. In that case, it goes from 100 to 300 to 500, and now if the kids sell that stock for $500, they pay no capital gains tax, or if they sell for 550, they're only paying a capital gains tax on the $50 profit at that point, all right.
And this works for just about any assets that are not in a retirement account. Obviously, things in 401ks or IRAs, you still got to pay tax, but if it's a house or stock, cryptocurrency, whatever it is, if it's gone up in value, whatever the value was when that person passed away, that is the new base. If it's gone up, and thus, the families are not only getting things tax-free because they don't have enough money to pay the estate tax; they're now getting it better than tax-free because the tax is being eliminated.
And that's why, you know, we recommend our clients, from a pure tax strategy, it's better always to hold those assets until you pass rather than trying to give those assets to your kids while you're alive. For example, if I, while I'm alive, if I paid $100 for a stock and it's now worth 300, and I give it to my children, they get what's called a carryover basis. Their basis in the stock still is $100, and so if they sell, and it doesn't matter if I pass away, that basis in that stock will always be that original $100, and they will never get the step up in basis if I give it to them while I'm alive.
