How gifting an appreciated asset can hand your children the tax bill along with the gift — and what to do instead.
By Ledly Jennings, L. Jennings Law — A Good Steward Firm
Most people think estate planning is about wills and trusts. And those documents matter — they are the backbone of nearly every plan we build. But some of the most expensive estate planning mistakes I see have nothing to do with which document a family signed. They come from a quieter decision: which asset gets passed down, and whether it is given during life or inherited at death.
That single decision can cost a family tens of thousands of dollars — or save it. Here is the piece most folks are never told.
Cost basis: the number behind the tax bill
When you buy an asset — stock, a piece of farmland, a rental property — what you paid for it becomes your cost basis. When you sell, you are generally taxed on the growth: the difference between your basis and the sale price.
Say you bought an asset years ago for $90,000, and today it is worth $540,000. That is $450,000 of built-in gain. Sell it yourself, and at the long-term capital gains rates that can apply to higher earners, the federal tax on that gain could run somewhere in the neighborhood of $107,000.
Here is the part that catches people off guard: that tax bill does not disappear when you give the asset away. It travels with whoever ends up holding it.
Gifting during life: you give the asset and the tax
This is the well-meaning mistake. A parent has an asset that has grown a lot in value, the kids could use a hand, and so the parent transfers it now, while they are living.
When you gift an appreciated asset during your lifetime, the person receiving it generally takes your original cost basis — what is called carryover basis. So that asset you bought for $90,000 and gifted when it was worth $540,000? In your child’s hands, the basis is generally still $90,000. When they sell, they may owe tax on the full $450,000 of growth — the same bill that would have been waiting on you.
The wealth you transferred is real. Unfortunately, so is the tax liability that rode along with it.
Inheriting at death: the basis “steps up”
Now here is the provision that surprises people the first time they see it — and it is one of the most powerful tools in the tax code for ordinary families.
When an asset is inherited at death rather than gifted during life, the cost basis generally resets to the fair-market value on the date of death. This is the stepped-up basis. That $90,000 asset now worth $540,000 generally steps up to $540,000. If the heirs sell shortly after, the taxable gain — and the tax on it — may be little or nothing.
For our Arkansas families, this matters far beyond the stock market. The same principle applies to appreciated farmland and the home place. Ground that has been in the family for forty years and grown many times over in value can pass to the next generation with that built-in gain wiped clean at death. Give it away during life, and that gain generally carries over to the kids instead.
The exception that changes everything: retirement accounts
This is the part I most want families to hear, because it is the one almost nobody mentions.
Traditional IRAs and retirement accounts generally do NOT get a stepped-up basis.
When your heirs inherit a traditional IRA, every dollar they withdraw is generally taxed as ordinary income — at their income tax rate, not capital gains rates. There is no reset, no step-up. The deferred tax that was sitting in that account during your lifetime generally passes straight through to your beneficiaries.
So consider two accounts that look identical on a statement: a $540,000 brokerage account holding appreciated investments, and a $540,000 traditional IRA. They are not the same inheritance — not even close. The brokerage account may pass with little or no federal capital gains tax thanks to the step-up. The IRA may cost your heirs many thousands of dollars in income tax as they draw it down. Same number on paper; very different value in your children’s hands.
(A Roth IRA is the meaningful exception — qualified Roth distributions are generally tax-free to heirs. It is one of several reasons Roth strategy deserves a seat at the estate planning table.)
What good stewardship looks like here
If you are in a position to be generous and want to pass wealth efficiently, the sequencing matters as much as the generosity. A few principles we work through with clients:
- Gift cash, not appreciated assets, during your lifetime. The recipient gets full value without inheriting your built-in tax.
- Leave appreciated assets to be inherited. Stock, farmland, the home place — these are often ideal candidates to pass at death, where the basis may step up and the gain may disappear.
- Spend from retirement accounts during your lifetime, rather than leaving a large traditional IRA as the primary inheritance, since heirs will generally owe ordinary income tax on every dollar.
None of this requires exotic structures. It requires knowing which assets carry a hidden tax and being intentional about when and how they move.
One caveat for larger estates
The step-up generally applies to assets included in the taxable estate. For estates above the federal exemption — roughly $13.99 million per individual / $27.98 million per couple in 2026 — federal estate tax can apply, and the interaction with the step-up gets more complicated. Most of our families are comfortably below those thresholds, which is exactly why the stepped-up basis is such an accessible, powerful tool for them. If your estate is approaching those numbers, that is a conversation for your attorney and CPA together.
And one human caveat
If your children genuinely need help today and you are in a position to give it — give it. Be there when it matters. The tax hit, in that case, is manageable and beside the point. Everything above is for families who are financially okay and simply want to pass what they have built as wisely as they can.
That is stewardship: not just deciding what to leave, but understanding how and when to leave it, so the legacy you worked a lifetime to build actually lands in the hands of the people you love.
If you would like to look at which of your assets carry a built-in tax — and how to structure things so your family keeps more of what you pass down — we would be glad to walk through it with you at L. Jennings Law.
This article is general education, not specific legal or tax advice. Every family’s situation is different, and tax rules change. Please consult your attorney and tax professional before acting.
