Step-Up in Basis, Explained: What Your Kids Actually Inherit (and What They Don't)

You've probably seen the post. Dad buys stock for $250K, it grows to $12M, he never sells, he borrows against it, and when he dies the kids inherit it at a $12M basis. “IRS gets $0.” The rule underneath that post is real, and it's called the step-up in basis. Here's how it works, which of your kid's accounts it touches, and the parts the viral version skips.

What a step-up in basis is

Cost basis is what you paid for an investment. When you sell, you owe capital-gains tax on the difference between the sale price and the basis. When you die still owning the investment, federal law generally resets the basis to the fair market value on the date of death. Your heirs can sell the next day and owe little or no capital-gains tax, because in the eyes of the tax code the gain you built over your lifetime never happened.

It works in both directions: an investment that lost value gets a step-down. And inherited property is automatically treated as held long-term, however briefly the heir owned it.

A simplified example

A parent bought $10,000 of an index fund that is worth $60,000 when they die.

That contrast, gift now versus leave it later, is the real decision for most families. Gifting shifts the gain into the child's lower bracket but carries your low basis with it (and can trigger the kiddie tax). Leaving the shares at death wipes the gain entirely, but the money isn't in the child's hands while they're young.

Which of your kid's accounts get a step-up

The viral math, checked

Each piece of the “buy, borrow, die” post is true on its own:

• Loan proceeds aren't income. Borrowing against a portfolio doesn't create a tax bill.
• The step-up erases the gain. An $11.75M gain disappears at death.
• No federal estate tax at $12M. The federal exemption is $15 million per person in 2026 (indexed for inflation), so a $12M estate is under it.

Here's what it leaves out:

• The loan isn't free. It carries interest, and the lender can demand more collateral or force a sale when the market drops.
• The loan still gets repaid. Usually by the estate selling after the step-up, which is the whole point, but it's a step the post skips.
• “A trust” is doing a lot of work. A revocable trust keeps the step-up. An irrevocable trust that moves assets out of the estate generally loses it. The post doesn't say which.
• States have their own taxes. A number of states levy estate or inheritance taxes at thresholds far below the federal one. “IRS gets $0” says nothing about the state.
• Above the exemption, the rate is 40%. The strategy only works tax-free at a size that is big enough to live on loans for decades and small enough to stay under the exemption.

Source for the exemption and rate: IRS, What’s new — Estate and gift tax.

What it means for an ordinary household

Most parents aren't borrowing against eight figures. But the same rule shapes three everyday choices:

1. Gifting appreciated shares now moves the gain into the child's bracket but carries your basis. See gifting appreciated stock.
2. Leaving appreciated shares at death wipes the gain but delays the money.
3. Inside a UTMA, tax-gain harvesting resets basis a little each year at a 0% rate, no death required.

Each path trades timing against tax, and the right mix depends on account sizes, your state, and your own plans.

Basis, estate and trust rules are detailed and change. MemoryBank is an education and display tool, not a financial, tax or legal advisor. Confirm anything here with a CPA or estate attorney before acting.

MemoryBank is not a brokerage. It cannot receive, keep or transfer securities. Every purchase, transfer and withdrawal described here happens at the financial institution holding the account.

Frequently asked questions

What is a step-up in basis?

When you die still owning an investment, federal law generally resets its cost basis to the fair market value on the date of death. Heirs who sell soon after owe little or no capital-gains tax, because the gain built during the original owner's lifetime is never taxed. If the investment lost value, the basis steps down instead.

Does a UTMA account get a step-up in basis when the parent dies?

Generally no. The money in a UTMA already belongs to the child, so a parent's death doesn't change the basis. A successor custodian takes over until the child reaches the age of majority. There is an edge case when the parent who funded the account is also the custodian and dies while the child is a minor, which is a question for a tax professional.

Is it better to gift stock to my child now or leave it to them when I die?

They produce different tax results. Shares gifted during your lifetime carry your original cost basis to the child, so the full gain is taxable when they sell, possibly under the kiddie tax. The same shares left at death get a step-up to market value, so the gain disappears, but the child doesn't have the money until then. Which fits your family depends on account sizes, timing and your state, and is worth confirming with a CPA.

Do assets in a trust get a step-up in basis?

It depends on the trust. Assets in a revocable living trust are still treated as yours and get the same step-up as a brokerage account. Assets moved into an irrevocable trust, out of your estate, generally give up the step-up, though some structures preserve it. That is a question for an estate attorney.

Is the viral "buy, borrow, die" strategy real?

The pieces are real: loan proceeds aren't income, the step-up at death erases the gain, and a $12 million estate is under the 2026 federal exemption of $15 million per person. What the post leaves out is that the loan carries interest and collateral risk, the estate still repays it, an irrevocable trust can forfeit the step-up, and a number of states tax estates or inheritances at much lower thresholds.

What to do this week

1. Check that every 529 and custodial account names a successor owner or successor custodian. See who takes over your kid's accounts.
2. If you hold appreciated shares you plan to give a child, note the basis before deciding between gifting now and leaving later.
3. If a trust is part of your plan, ask the attorney one question: does this trust keep the step-up?