Estate & Gift Tax Rules: Unified Exemption & Step-Up in Basis

Almost nobody pays federal gift or estate tax, and almost everybody worries about it. The rule that actually changes outcomes for ordinary families is a quieter one about cost basis — and it makes giving during life and leaving at death completely different decisions.

Last verified 2026-07-26

Death erases a lifetime of gains

When you inherit an asset, its cost basis resets to the market value on the date of death. Every dollar of growth during the owner's lifetime simply stops existing as far as capital gains tax is concerned — sell it that week and there's no gain to report.

That single rule makes giving during life and leaving at death completely different transactions. A lifetime gift carries your original basis over to the recipient along with the asset, so they inherit the embedded gain too. A bequest wipes it out.

There's one large exception, and it applies to the assets most people actually inherit. Traditional IRAs and 401(k)s are income in respect of a decedent and get no step-up at all — the beneficiary pays ordinary income tax on withdrawals exactly as the original owner would have.

Two different allowances people constantly merge

The annual exclusion is what you can give any one person in a year with no reporting at all. It's per recipient, not per giver in total, so ten recipients means ten separate allowances — and a married couple has two of everything.

The lifetime exemption is a much larger, once-in-a-lifetime pot: $15,000,000 per person in 2026, covering lifetime gifts and your estate together. That's what 'unified' means.

Exceed the annual exclusion and you don't owe tax. You file Form 709 and the excess draws down your lifetime exemption. For all but a very small number of estates, that's a reporting exercise with no payment attached — the tax only bites once cumulative gifts and estate together exceed the exemption.