For most of the last century, estate planning was largely about one thing: keeping the federal estate tax from taking a 40% bite out of what you leave behind. That era is effectively over for the vast majority of families. In 2026 the federal estate and gift tax exemption sits at $15 million per person (as of the time of this writing) — about $30 million for a married couple — and it is now indexed to keep rising. Fewer than one percent of estates will ever owe a dollar of federal estate tax.
So the question I hear more and more is a fair one: if I will never owe estate tax, what is left to plan for? The answer is income tax — specifically, capital gains tax on appreciated assets. And the single most valuable tool in that arena is a quiet provision of the tax code called the step-up in basis. For families below the estate tax thresholds, getting the step-up right is now the main event.
First, a Washington Caveat
Before we go further, one important local wrinkle. Everything above is true at the federal level — but Washington runs its own estate tax with an exemption of just $3 million per person and no portability between spouses. So a Washington family can be completely safe from federal estate tax and still face a substantial state estate tax bill. I cover that in detail in a companion article on Washington's estate tax. Keep it in mind as you read, because it creates a genuine tension between saving state estate tax and capturing the income tax benefits I am about to describe. That tension is the heart of modern planning here, and I will come back to it.
What 'Basis' Actually Means
Start with the vocabulary, because everything flows from it. Your 'basis' in an asset is, roughly, what you paid for it — your original cost, adjusted over time for things like improvements or depreciation. When you sell, you pay capital gains tax on the difference between the sale price and your adjusted basis. Buy stock for $100,000, sell it for $400,000, and you have a $300,000 capital gain that gets taxed.
The lower your basis, the bigger your taxable gain when you sell. A rental house bought decades ago for $80,000 and now worth $700,000 carries an enormous built-in gain. Sell it during life and that gain comes due. This is why highly appreciated, low-basis assets — old real estate, founder's stock, a long-held brokerage account — are the ones where basis planning matters most.
The Step-Up: The Most Powerful Rule in the Code
Here is the rule that changes everything. Under Section 1014 of the Internal Revenue Code, when you die, the assets in your estate get their basis reset — 'stepped up' — to their fair market value on your date of death. The appreciation that built up during your lifetime simply disappears for income tax purposes. Your heirs inherit the asset as if they had just bought it at today's value.
Return to that rental house. If you sold it the day before you died, you would owe capital gains tax on more than $600,000 of appreciation. But if you hold it until death, your children inherit it with a basis stepped up to $700,000. If they then sell it for $700,000, their taxable gain is zero. A lifetime of appreciation, wiped clean. As a bonus, inherited assets are automatically treated as long-term, so any post-death growth qualifies for the lower long-term capital gains rate regardless of how quickly the heirs sell.
Washington's Hidden Bonus: The Double Step-Up
Now for a genuine advantage of living in Washington. Washington is a community property state, and that unlocks something couples in most of the country cannot get: the 'double step-up.'
In a common-law (separate property) state, when the first spouse dies, only that spouse's half of a jointly owned asset gets stepped up. The survivor's half keeps its old, low basis. But under Section 1014(b)(6), community property is treated as a single unit — so when the first spouse dies, one hundred percent of the community asset steps up to fair market value, not just half. The surviving spouse can then sell with little or no capital gains tax on the entire lifetime appreciation.
Imagine a couple who bought Puget Sound rental property years ago for $200,000, now worth $1.2 million. In a separate-property state, the survivor selling after one spouse's death would still owe tax on roughly half the $1 million gain. In Washington, if the property is properly held as community property, the full basis steps up to $1.2 million and that entire gain can vanish. This is one of the most valuable and least appreciated benefits of Washington law.
And here is a point that surprises even sophisticated clients: this double step-up is not limited to real estate located inside Washington. Whether an asset is community property is generally determined by the law of the state where the married couple is domiciled — not by the state where the property happens to sit. So a Washington-domiciled couple who owns a rental house in Idaho, a condo in Arizona, or ranch land in a separate-property state can still have that property treated as community property, and still capture the full double step-up. It is the decedent's state of residence that controls, not the situs of the property. The practical takeaway is significant: your Washington domicile can extend this powerful income tax advantage to appreciated real estate you own well beyond Washington's borders.
The Assets That Do Not Step Up
The step-up is powerful, but it is not universal, and misunderstanding its limits leads to expensive surprises. A major category of assets receives no step-up at all: what the code calls 'income in respect of a decedent,' or IRD.
These are assets funded with money that was never taxed during your lifetime, so the tax simply follows the asset to your heirs. The big ones are traditional retirement accounts — IRAs, 401(k)s, 403(b)s — along with non-qualified annuities, accrued but unpaid deferred compensation, and the untaxed interest on savings bonds. When your heirs draw money out of an inherited traditional IRA, they pay ordinary income tax on it, just as you would have. There is no basis reset to rescue them. And under the SECURE Act, most non-spouse beneficiaries must now empty an inherited retirement account within ten years, which can stack that taxable income into their peak earning years.
Roth accounts are the happy exception: they also get no step-up, but qualified withdrawals are already income-tax-free, so heirs generally receive them without an income tax hit. The practical lesson is that not all inheritances are created equal. A $500,000 brokerage account and a $500,000 traditional IRA are worth very different amounts after tax — something worth weighing when you decide which assets to spend, which to give, and which to leave to whom.
The Great Tension: Estate Tax vs. Income Tax
Now we arrive at the dilemma that defines estate planning for Washington families. You have two different taxes pulling in opposite directions.
To save Washington estate tax, the instinct is to move assets out of your taxable estate — often by gifting them during your lifetime. Washington has no gift tax, so this can be remarkably effective at shrinking a taxable estate below the $3 million line. But there is a catch that trips up well-meaning families: when you give an appreciated asset away during life, the recipient takes your old basis — 'carryover basis' — not a stepped-up one. You have removed the asset from your estate, but you have also handed your heirs a built-in capital gain they will owe tax on when they sell.
Hold that same asset until death and the opposite happens: it stays in your estate (potentially exposed to Washington estate tax), but it receives the full step-up, erasing the capital gain. So the real question is never simply 'how do I avoid estate tax?' It is 'which tax costs my family more — the estate tax on this asset, or the capital gains tax my heirs would owe if I strip away its step-up?' The answer is different for every asset and every family.
When Holding Beats Gifting
For the many families whose estates fall comfortably below both the $3 million Washington threshold and the $15 million federal threshold, the analysis is often refreshingly simple: do not give away highly appreciated assets during your lifetime. If there is no estate tax to save, gifting appreciated property only throws away a valuable step-up and saddles your heirs with a capital gains bill you could have eliminated by doing nothing more than holding the asset until death.
This is a genuine shift in thinking. For decades, 'give it away while you can' was reflexive advice. Today, for a family with no estate tax exposure, the smarter move is frequently to hold appreciated assets, let them step up at death, and gift cash or high-basis assets instead if lifetime giving is a goal.
When Gifting Still Makes Sense
Gifting has not lost its place — it just has to be aimed carefully. It still shines in several situations. If your Washington estate is comfortably above $3 million, the estate tax you eliminate by gifting can far outweigh the capital gains cost of losing a step-up, especially on assets that have not appreciated much. Cash and high-basis assets are ideal gifting candidates because there is little or no built-in gain to forfeit. And assets you expect to appreciate dramatically in the future can be powerful gifts: you move today's value — and all of tomorrow's growth — out of your estate now, which is the essence of a 'freeze' strategy.
The point is not that gifting is good or bad. It is that the choice between gifting and holding should be made asset by asset, with both the estate tax and the basis consequences on the table at the same time.
Funding the Tax Instead of Just Fighting It: Life Insurance and the ILIT
There is one more move that too often gets overlooked, and it can be an elegant marriage of estate planning and asset redeployment: using life insurance, owned by an irrevocable life insurance trust (ILIT), to fund whatever tax ultimately comes due.
Here is the idea. Not every tax can be planned away. If your estate is large, some Washington estate tax may simply be unavoidable — and if you gift an appreciating asset out of your taxable estate to save that estate tax, you may have traded it for a future capital gains bill when your heirs sell, because the asset lost its step-up. Either way, a bill is coming. Life insurance lets you pre-fund that bill with dollars that arrive exactly when they are needed: at death.
The key structural point is the ILIT. If you personally own a policy on your own life, its full death benefit is pulled back into your taxable estate — the very problem you were trying to solve. But if an ILIT owns the policy, the death benefit passes outside your taxable estate entirely and lands in the hands of your trustee, income- and estate-tax-free, ready to pay the estate tax or the heirs' capital gains tax without forcing a fire sale of the family business, the farm, or the real estate.
And here is the reframing I want clients to sit with: for a family that already has more than enough, the premium is not really an expense. It is a reallocation of assets you are already holding — dollars currently parked in other investment vehicles — into a different asset whose internal rate of return is the death benefit, deployed at the precise moment of need. You are not spending money you need to live on; you are repositioning surplus capital so it does the most tax-efficient work possible for the next generation. For the right family, that is one of the most efficient uses of a dollar in the entire estate plan.
Prove the Value: Document Basis at Death
One practical closing note that saves families real aggravation. The step-up is only as good as your ability to prove it. When someone dies owning real estate, a business interest, or other hard-to-value assets, the family should obtain a date-of-death appraisal to establish the new basis. Years later, when the asset is sold, that appraisal is what supports the stepped-up figure on the tax return. Skipping it can mean losing the benefit you were entitled to simply because no one documented the value while it could still be pinned down.
What This Means for You
The ground under estate planning has shifted. With the federal exemption at $15 million (as of the time of this writing), most families are no longer planning primarily to dodge the estate tax — they are planning to protect their heirs from unnecessary income tax. The step-up in basis is the centerpiece of that effort, and Washington's community-property double step-up makes it more valuable here than in most of the country.
But Washington's own $3 million estate tax keeps the picture from being simple. The right plan threads the needle between two taxes — capturing step-ups where they matter most, gifting where the estate tax savings justify it, and titling assets so the double step-up is not accidentally lost. That balance depends entirely on your specific assets, their basis, and the size of your estate.
If your plan was built in the old 'avoid estate tax at all costs' mindset, or if it has not been reviewed since Washington's recent estate tax changes, it is worth a fresh look through this income-tax lens. I would be glad to walk through your situation with you. 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 and exemption figures change, and the right strategy depends on your specific facts, so please confirm the details with an attorney before acting.
