How does a will affect stepup in basis for assets

I recently spoke with a client, David, whose mother passed away unexpectedly. She had a valid will, but it wasn’t particularly sophisticated, and now his family is facing a significant capital gains tax bill on her inherited home. He assumed a will automatically shielded them from that, and was devastated to learn it didn’t work that way. A well-crafted estate plan, particularly when dealing with appreciated assets, is crucial to minimize those taxes – and a simple will often falls short.

What is “Step-Up in Basis” and Why Does It Matter?

“Step-up in basis” is a tax benefit that allows heirs to receive inherited assets at their fair market value on the date of the decedent’s death, rather than the original cost basis. This can significantly reduce capital gains taxes when the asset is later sold. For example, if your mother purchased stock for $10,000 and it’s worth $50,000 when she dies, you receive a new cost basis of $50,000. If you sell it immediately for $50,000, you owe no capital gains tax. Without the step-up, you’d be taxed on the $40,000 gain.

How a Will Impacts Step-Up in Basis

A valid will, in and of itself, doesn’t guarantee step-up in basis. It simply dictates who receives the assets. The IRS grants the step-up based on the transfer of ownership at death, regardless of whether there’s a will or not. However, a poorly drafted will can create complications that delay or jeopardize that benefit. The primary issue arises when the probate process is prolonged or contested. A will contest, even if ultimately unsuccessful, can delay the final accounting and transfer of assets, potentially impacting the valuation date for step-up purposes. The IRS generally uses the date of death as the valuation date, but delays can sometimes shift this, costing your heirs money.

The CPA Advantage: Beyond Just the Will

As both an Estate Planning Attorney and a Certified Public Accountant (CPA) with over 35 years of experience, I see this issue frequently. Many attorneys focus solely on the legal aspects of the will, overlooking the critical tax implications. My dual perspective allows me to structure estate plans that proactively minimize taxes, not just distribute assets. This includes careful consideration of asset titling, beneficiary designations, and the use of trusts. For instance, I routinely advise clients on the implications of Prop 19; under Prop 19, heirs can only keep a parent’s low property tax base if they move into the home as their primary residence within one year and the home’s value is within specific limits. Failing to plan for this can result in a substantial property tax increase.

Probate and the New AB 2016 Rules

Here in California, the probate process is often the biggest hurdle. Fortunately, Assembly Bill 2016 (AB 2016) has simplified things for many estates. For deaths on or after April 1, 2025, a primary residence valued up to $750,000 qualifies for a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151). This is a streamlined process compared to traditional probate. However, it’s crucial to remember this is a Petition requiring a Judge’s Order – not a simple Affidavit. Moreover, to qualify, the decedent’s other non-real estate assets typically must remain below the separate $208,850 Small Estate limit. If assets exceed that, formal probate is still required. Distinguish this from the Small Estate Affidavit, which is strictly for real property less than $69,625, like timeshares or vacant land.

Digital Assets and RUFADAA

Don’t forget about digital assets. Increasingly, wealth is held in online accounts – bank accounts, brokerage accounts, cryptocurrency, and even digital intellectual property. Without specific RUFADAA language (Probate Code § 870) in your Trust or Will, service providers like Coinbase and Google can legally deny your executor access to these assets, potentially causing significant delays and lost opportunities for step-up in basis. This is a quickly evolving area of law that requires specialized knowledge.

Business Interests and FinCEN Reporting

If the estate includes ownership in a Limited Liability Company (LLC), be aware of the evolving BOI (Beneficial Ownership Information) reporting rules. While as of March 2025, domestic U.S. LLCs are exempt from mandatory BOI reporting under the Corporate Transparency Act, executors managing foreign-registered entities must still file updates within 30 days to avoid fines of $500/day.

High Net Worth Estates and the OBBBA

For high-net-worth individuals, the estate tax landscape is also changing. The 2026 ‘Sunset’ was averted by the OBBBA, which permanently increased the Federal Estate Tax Exemption to $15 million per person effective Jan 1, 2026. Proper planning is still essential to maximize the benefits of this exemption and minimize potential estate taxes.

Ultimately, a will is just one piece of the puzzle. A comprehensive estate plan, crafted with both legal and tax considerations in mind, is essential to ensure your heirs receive the maximum benefit of step-up in basis and avoid unnecessary tax burdens.

What makes a California will legally enforceable when it matters most?

In California, a last will and testament is reviewed under probate standards that focus on intent, capacity, and execution. Clear drafting reduces ambiguity, limits misinterpretation, and helps families avoid unnecessary conflict during estate administration.

For California residents, understanding how intent, authority, and compliance interact is one of the most effective ways to protect family harmony and estate integrity. A will that anticipates probate scrutiny is far more likely to be honored as written and far less likely to become the source of unnecessary conflict.

Resources for Asset Management & Transfer

• Property Tax Reassessment: California State Board of Equalization (Prop 19)
  This page details the “Base Year Value Transfer” rules. It explains that heirs can only avoid a property tax reassessment if the inherited home becomes their primary residence and the Homeowners’ Exemption is filed within one year of the date of death.
• Real Estate Probate (AB 2016): California Probate Code § 13151 (Petition for Succession)
  The specific statute for the AB 2016 process. It outlines the requirements for using a court-approved “Petition” (not an affidavit) to transfer a primary residence worth $750,000 or less (gross value) for deaths occurring after April 1, 2025.
• Small Estate Affidavit: California Probate Code § 13100 (Personal Property)
  Access the statutory language for the “Small Estate Affidavit.” This procedure is strictly for Personal Property (cash, stocks, vehicles) and is limited to estates with a total value of $208,850 or less (effective April 1, 2025).
• Federal Estate Tax Exemption: IRS Estate Tax Guidelines
  The authoritative federal resource for estate valuation. It reflects the 2026 exemption increase to $15 million per person, which is critical for high-net-worth asset planning and determining if an IRS Form 706 is required.
• Unclaimed Assets: California State Controller – Unclaimed Property
  The primary portal for executors and heirs to search for “lost” assets—such as forgotten bank accounts, uncashed dividends, and insurance benefits—that have been remitted to the State of California for safekeeping.
• Business/LLC Compliance: FinCEN – Beneficial Ownership Information (BOI)
  The official portal for corporate transparency reporting. Most domestic and foreign entities (LLCs, Corps) must file a report. Executors must verify compliance, as failure to update control information within 30 days of death can result in federal civil penalties.