In a companion article I explained why the step-up in basis has become the single most valuable income tax tool in estate planning. When it works, it can erase a lifetime of capital gains in a single moment. But the step-up is not self-executing, and the tax code is littered with provisions that can forfeit it, dilute it, or hand your heirs a tax bill you never intended.
What follows are eight specific traps I see regularly in practice. Every one of them has cost real families real money — often tens or hundreds of thousands of dollars — and every one of them is avoidable with the right planning.
Trap 1: Gifting Appreciated Assets During Life
This is the single most common basis mistake I encounter, and it usually comes from the best of intentions. A parent decides to gift the family cabin, a rental property, or a stock portfolio to their children during life — sometimes to simplify things, sometimes to reduce their taxable estate, sometimes because an article or a well-meaning friend said it was a good idea.
Here is the problem. When you give an appreciated asset away during your lifetime, the recipient receives your original cost basis — what the code calls "carryover basis." They inherit not just the asset, but your entire built-in capital gain. If you bought that rental property decades ago for $120,000 and it is now worth $750,000, your children take it with a $120,000 basis. When they sell, they owe capital gains tax on $630,000 of appreciation that accumulated on your watch.
Now compare the alternative: you hold the property until death. Under Section 1014, the basis steps up to $750,000. Your children sell for $750,000, and the taxable gain is zero. You saved them roughly $150,000 or more in combined federal and state capital gains taxes by doing nothing — just holding.
This does not mean gifting is always wrong. If your estate is well above Washington’s $3 million estate tax threshold and the asset has not appreciated much, the estate tax savings can outweigh the lost step-up. Cash and high-basis assets are also fine to gift freely. But gifting a highly appreciated asset to save estate tax when the capital gains cost exceeds the estate tax savings is a trap I see families walk into over and over.
Trap 2: Titling That Costs You the Double Step-Up
Washington is a community property state, and that gives married couples access to one of the most powerful provisions in the tax code: the double step-up under Section 1014(b)(6). When the first spouse dies, one hundred percent of a community property asset steps up to fair market value — not just the decedent’s half. I covered this in depth in the step-up article, and it can save surviving spouses enormous sums.
But the double step-up only applies to assets that are actually community property — and the IRS looks at how the asset is titled and documented when deciding whether it qualifies. This is where families lose the benefit, not because a court strips anyone’s ownership rights, but because the asset was never properly characterized as community property in the first place.
The most common version of this trap involves a couple who acquires property during the marriage with community funds but titles it in only one spouse’s name, or as tenants in common, or in a trust that does not clearly identify the asset as community property. Under Washington law the asset is still community property regardless of how it is titled — the community presumption is strong and courts will not strip a spouse of their interest over a mere titling error. But the IRS does not apply Washington’s community property presumption. When the first spouse dies and the surviving spouse claims a full double step-up, the IRS may look at the deed, the brokerage account registration, or the trust instrument and see something that looks like separate property or a tenancy in common — and allow a step-up on only half.
The mirror image also matters. A spouse who receives an inheritance — separate property by definition — and deposits it into a joint account used for household expenses may lose the ability to trace those funds back to their separate origin. In Washington, assets that cannot be traced are presumed to be community property. That is usually fine for ownership purposes, but it can create confusion about the character of the asset for federal tax purposes, particularly if the couple later needs to establish that specific funds were separate property for estate or gift tax reasons.
The fix is straightforward: make sure community property is clearly titled and documented as community property so the IRS has no reason to question it. A community property agreement, properly drafted deeds, and account registrations that reflect the true character of the asset can protect the double step-up without any change to who actually owns what.
Trap 3: The Irrevocable Trust That Forfeits the Step-Up
Irrevocable trusts are a cornerstone of estate planning for larger estates. They can remove assets from your taxable estate, protect them from creditors, and provide structured distributions to beneficiaries. But there is a basis trap built right into their design.
The step-up under Section 1014 only applies to property that is included in the decedent’s gross estate for federal estate tax purposes. The entire point of many irrevocable trusts is to remove assets from that estate. See the conflict? If the trust succeeds at its estate tax job, the assets inside it do not receive a step-up when the grantor dies.
The IRS drove this point home with Revenue Ruling 2023-2, which confirmed that assets in an irrevocable grantor trust are generally not considered to have been acquired from the decedent — and therefore do not get a basis adjustment at death. Even though the grantor may still be paying income tax on the trust’s earnings (grantor trust status), that does not cause estate inclusion.
For a family with highly appreciated assets in an irrevocable trust, this can be a rude surprise. The estate tax was saved, but the heirs now face a capital gains bill that dwarfs the estate tax they avoided.
There are planning techniques to address this — swap powers that let the grantor exchange high-basis assets for the low-basis assets in the trust, or carefully drafted powers of appointment that cause just enough estate inclusion to trigger the step-up without undoing the trust’s other benefits. But these must be built into the trust from the start or added while the grantor is still alive and competent. Once the grantor dies without them, the opportunity is gone.
Trap 4: The One-Year Boomerang Rule
This one catches families who are trying to be clever — and sometimes families who are just trying to be kind.
Section 1014(e) contains what practitioners call the "one-year rule" or the "boomerang rule." It works like this: if you gift appreciated property to someone, that person dies within one year, and the property comes back to you (or your spouse) through their estate, you do not get the step-up. The basis stays exactly where it was before the gift — your old carryover basis.
Congress enacted this specifically to prevent people from gifting low-basis assets to an elderly or terminally ill relative, waiting for the death, and receiving the asset back with a freshly laundered basis. The statute applies mechanically — it does not ask whether tax avoidance was your intent.
The trap catches well-meaning families more often than you might expect. An adult child transfers appreciated stock to a parent to help with care expenses; the parent passes away a few months later and the stock comes back through the will. No step-up. A spouse gifts a property to the other spouse for estate planning reasons; the recipient spouse dies unexpectedly within the year. No step-up on the return.
The key limitation of 1014(e) is that it only blocks the step-up when the property returns to the original donor or the donor’s spouse. If it passes to someone else — say, the donor’s children — the step-up is allowed. But the property has to genuinely pass to that other person; the IRS will scrutinize arrangements that look like indirect returns to the donor.
Trap 5: Assuming Retirement Accounts Step Up
This may be the most widespread misunderstanding in all of estate planning. Many families assume that when they inherit a parent’s IRA or 401(k), the account gets the same step-up treatment as a brokerage account or a piece of real estate. It does not.
Traditional retirement accounts — IRAs, 401(k)s, 403(b)s, deferred annuities — are what the tax code calls "income in respect of a decedent," or IRD. These assets were funded with pre-tax dollars, and the tax that was deferred during the original owner’s lifetime follows the money to whoever receives it. When your heirs withdraw from an inherited traditional IRA, they pay ordinary income tax on every dollar — at their own marginal rate, which could be 32%, 35%, or higher.
The SECURE Act made this substantially worse for most non-spouse beneficiaries. Before 2020, an heir could "stretch" inherited IRA withdrawals over their own life expectancy, spreading the income and the tax over decades. Now, most non-spouse beneficiaries must empty the account within ten years of the owner’s death. And if the original owner had already begun taking required minimum distributions, the beneficiary must also take annual distributions during those ten years — they cannot simply wait and withdraw everything in year ten.
The practical result is that a large inherited IRA can push your children into the highest tax brackets during their peak earning years. A $1 million inherited IRA is not the same as a $1 million inherited brokerage account. After taxes, the IRA might be worth $650,000 or less, while the brokerage account — thanks to the step-up — could be worth nearly the full million.
This has real planning implications for which assets to spend during your lifetime, which to leave, and to whom. Roth conversions during your lifetime, strategic withdrawal sequencing, and thoughtful beneficiary designations can all help reduce the income tax hit your heirs face.
Trap 6: Holding Depreciated Assets Until Death
The step-up in basis is usually your friend, but not always. The same rule that resets appreciated assets to their higher fair market value also resets depreciated assets — downward.
If you hold an asset that has lost value — stock that has declined, a piece of equipment that is worth less than you paid, a rental property in a market that has fallen — and you die still holding it, the basis steps down to the current (lower) fair market value. That means the unrealized capital loss you could have claimed during your lifetime simply vanishes. Your heirs inherit the asset at the lower value and can never use that loss.
The missed opportunity can be significant. If you sold the asset while alive, you could have harvested the capital loss, used it to offset other gains or up to $3,000 of ordinary income per year, and carried any excess forward. Dying with the loss destroys it permanently.
The lesson is simple: the step-up is a reason to hold appreciated assets, but it is equally a reason not to hold depreciated ones. If you own assets with unrealized losses, consider selling them during your lifetime to capture the tax benefit. You can gift the cash proceeds, buy a different asset, or simply keep the loss on your return. What you should not do is let the loss die with you.
Trap 7: Forgetting Washington’s Capital Gains Tax
Even when you do everything right and your heirs receive a clean step-up, Washington has an additional layer that can surprise families who are not prepared for it.
Washington imposes a capital gains tax on the sale of certain long-term capital assets — primarily stocks, bonds, and business interests (real estate sold directly is excluded). The current rate is 7% on gains up to $1 million above the standard deduction, and 9.9% on gains above that threshold.
Here is where the trap operates. An heir inherits a large stock portfolio and receives the step-up — their basis resets to fair market value as of the date of death, and the pre-death appreciation is eliminated. Good. But the heir holds the portfolio for a few more years, it appreciates further, and when they sell, the post-death gain is subject to Washington’s capital gains tax on top of the federal tax.
The step-up only eliminates gain that accrued before death. Any appreciation after the date of death is fully taxable. Heirs who delay selling inherited stocks or business interests, assuming the step-up gave them permanent protection, can find themselves facing a Washington tax bill they did not expect.
This does not mean heirs should rush to sell everything the day after they inherit it. But it does mean they should understand that the step-up resets the clock — it does not stop it.
Trap 8: No Date-of-Death Appraisal
I saved this one for last because it is the most preventable and the most frustrating when it happens. The step-up in basis is only as good as your ability to prove it.
When someone dies owning real estate, a closely held business interest, artwork, collectibles, or other hard-to-value property, the family needs a qualified appraisal establishing the fair market value as of the date of death. That appraisal is what establishes the stepped-up basis. Years later, when the asset is sold, the appraisal is the documentation the heir puts on their tax return to support the new, higher basis figure.
Without it, the IRS can challenge the claimed basis, and the burden of proof falls on the taxpayer. I have seen families lose tens of thousands of dollars in additional capital gains tax simply because no one ordered an appraisal at the time of death, and by the time the property was sold years later, establishing the date-of-death value had become expensive, imprecise, or impossible.
Publicly traded securities are simple — the closing price on the date of death is the basis, and brokerage statements document it. But for real estate, business interests, and other illiquid assets, you need an independent appraisal. The cost is modest — typically a few hundred to a few thousand dollars — and it protects a benefit that can be worth hundreds of thousands. It is one of the simplest and most cost-effective steps in the entire estate settlement process, and skipping it is a trap that should never catch anyone.
Putting It Together
Every one of these traps shares a common thread: the step-up in basis is not automatic, it is not universal, and it can be quietly forfeited by actions that seem reasonable on their own. Gifting out of generosity. Commingling assets out of convenience. Structuring a trust to minimize estate tax without considering the income tax trade-off. Skipping an appraisal to save a modest fee.
The good news is that every one of them is avoidable. The right estate plan accounts for basis at every turn — not just estate tax, not just income tax, but the interplay between them. It asks, for every asset: what happens to the basis if I gift this, hold this, put this in a trust, or retitle this? And it documents the values that matter so the benefit is not lost to a paperwork gap.
If your plan was built before the federal exemption rose to $15 million (as of the time of this writing), there is a good chance it was optimized for estate tax avoidance without fully accounting for the basis consequences I have described here. That is not anyone’s fault — the rules and the math have changed. But it is worth revisiting.
I would be glad to walk through your specific situation and identify which of these traps, if any, might apply to your family. Call me at (253) 564-1856 or use the contact form on this site — there is no charge for an initial consultation.
This article is general information about federal and Washington law as of mid-2026 and is not legal or tax advice for your particular situation. Tax basis rules change, and the right strategy depends on your specific facts, so please confirm the details with an attorney before acting.
