Step-Up Strategy for Beneficiaries | Stewardship Concepts Financial Advisors

When it comes to estate planning, a common concern among families is how to transfer wealth to the next generation without leaving heirs with an unanticipated tax bill. A frequently overlooked tool that can have a tremendous impact on tax and estate planning is known as the step-up in cost basis. As a financial advisor in Spokane, I've witnessed this technique save families tens—or even hundreds—of thousands of dollars in taxes.

Let's explain it in plain English.

What Is the Step-Up in Basis?

If you purchase an asset like stock, rental property, or a vacation home, the original purchase price (plus improvements if it is real estate) is your "cost basis." When you later sell the asset for more than your cost basis, you owe capital gains tax on the profit.

Here's where the step-up comes in:

If you give the asset to your heirs at death, the cost basis is reset to the fair market value on the date of your death.

That would allow your heirs to immediately sell the asset and owe minimal or no capital gains tax.

This single tax feature of U.S. estate law can wipe out decades of taxable growth. (IRS explanation of basis).

A Simple Example

Suppose you purchased Microsoft stock years ago for $50,000. As time goes by, it appreciates to become worth $300,000.

If you sold it during your lifetime, you'd owe capital gains tax on $250,000 of appreciation.

But if you hold on to the stock until you die and then leave it to your kids, their cost basis steps up to $300,000—the current market value.

If they sell right away for $300,000, no capital gains tax is due. That’s a savings of tens of thousands of dollars. (See Investopedia’s guide on step-up in basis for additional examples.)

Why This Matters to Families in Spokane

A lot of Spokane residents have accumulated wealth in 401(k) plans, IRAs, investment real estate, or even primary residences that have increased significantly in value. Washington State does not have an income tax, but it has one of the country's lowest estate tax exemptions at $3 million per individual in 2025 (Washington State Department of Revenue). This makes strategic planning even more essential for families with substantial real estate or investment portfolios.

A financial advisor in Spokane can help you:

Balance giving property during your lifetime versus keeping it in your estate for the step-up benefit.

Consider how Roth conversions and philanthropy fit into your long-term strategy.

Structure, property, and account ownership to save heirs from probate and tax hassles.

When NOT to Give Appreciated Assets

There are a lot of well-meaning parents and grandparents who wish to assist their children throughout their life, either by gifting them stock shares or assisting them with property. Admirable as this is, the catch is:

If you give away appreciated property while you're alive, the recipient also inherits your original cost basis.

That would result in your child having to pay a significant capital gains tax if they sell the donated stock or property.

If you do wish to give during your lifetime, it is generally better to give cash rather than property that has increased in value. This allows your heirs to enjoy financial assistance now without losing the valuable tax benefit of a future step-up.

Coordinating the Step-Up with Other Strategies

The step-up approach is effective, but it's not for everyone. A complete financial plan should supplement it with other tools, such as:

Roth Conversions

Reducing future income tax liability on retirement accounts.

Qualified Charitable Distributions (QCDs) – Minimizing taxable income in retirement and giving back to what is important.

Washington State Estate Tax Planning– Utilizing trusts, gifting strategies, or charitable vehicles to stay below exemption thresholds.

Retirement Income Planning – Figuring out when to take Social Security and pensions so that your income tax situation is optimal.

Together with careful planning, these techniques can help you minimize taxes and maximize the wealth you transfer.

The Bottom Line

The step-up in basis is one of the most valuable estate planning strategies available. It allows families to keep appreciated assets in the estate, avoid capital gains taxes, and pass more wealth to the next generation.

But here's the catch: each family's circumstances are different. Your retirement accounts, pension plans, real estate investments, and the size of your estate all figure into whether this plan is suitable for you.

That’s why working with a financial advisor who knows Spokane's tax scenario and Washington State's estate laws can make all the difference.

Next Steps

If you're near retirement or retired and wish to ensure your estate plan saves your heirs from avoidable taxes, it's time for a discussion.

As a financial planner in Spokane, my role is to help families like yours navigate Roth conversions, estate tax planning, and strategies like the step-up in basis—so your legacy goes to your family, not the IRS.

Let's chat on how this plan fits into your strategy. The beginning point is a conversation.

About the Author

Noah Schwab CFP® is a financial advisor in Spokane, Washington, helping retirees with $ 1M+ maximize their 401(k) with Roth conversions and tax strategies.