The Step-Up That Isn't Yours Yet

The login works. That, by itself, is slightly strange. The name is still on the account. The tax lots, purchased over two decades, sit there in chronological order, showing a cost basis that — on the morning after — is no longer correct, and won't be corrected for weeks.

This is the odd space an inheritor occupies. Under §1014 of the Internal Revenue Code, the cost basis of most inherited securities resets to fair market value as of the date of death. The appreciation that accrued during the decedent's lifetime — sometimes decades of it — is simply erased from the tax code's ledger. In principle.

In practice, nothing has moved. The step-up has happened to the numbers. It has not yet happened to the portfolio anyone will actually sell from. That gap, which usually lasts three to six months, is where the avoidable mistakes get made.

A cost basis reset you haven't finished yet

The mechanism is straightforward, and it does most of its work automatically. Section 1014 resets the basis of most property acquired from a decedent to its fair market value on the date of death. A share bought at $12 in 1998 and trading at $210 the morning of the funeral has a new basis of $210. The $198 of built-in gain that would have been a taxable event for the decedent — had the shares been sold the day before — simply ceases to exist as a tax consequence for anyone.

This is not a loophole, and it is not an optimization. It is the default treatment, one of the oldest in the federal tax code, and it applies to ordinary taxable brokerage accounts, individual securities, most mutual funds, and appreciated real property. (Retirement accounts are different; they carry income in respect of a decedent under §691, not a step-up. Inherited IRAs are their own subject, handled elsewhere.)

What the default does not do is populate anyone's computer system. The step-up is a statutory fact. Recording it, verifying it, and making it usable when a position is eventually sold is an administrative task that falls to the inheritor, the executor, the custodian, and — in a coordinated family — all of them together.

What the date of death is actually worth

The valuation rule is narrow and, for publicly traded securities, unambiguous. The fair market value on the date of death is the mean of the highest and lowest quoted selling prices on that trading day. If the decedent died on a weekend or a market holiday, the valuation is a weighted interpolation between the nearest preceding and following trading days, with the weights determined by the number of calendar days on each side. These rules live in Treasury Regulation §20.2031-2 and have been in place, substantively unchanged, for decades.

For most publicly traded holdings, the number is therefore not negotiable. It can be computed by anyone with a historical quote service and a calendar. For thinly traded securities, private holdings, and unusual assets, the valuation can be considerably more involved, and a qualified appraiser is usually indicated.

The consequence of getting the valuation wrong is not immediate. It is deferred until the first sale, and then it surfaces as a larger or smaller gain than the inheritor expected on the 1099. Discovering the error at that point is not fatal, but it is tedious, and it usually involves a request to the custodian for a cost basis correction that may or may not be processed in time for the tax filing.

The six-month question

There is a second valuation election — the alternate valuation date, under §2032 — that permits the estate to value all assets six months after the date of death rather than on the date of death itself. It is available only under two conditions: a federal estate tax return must be required, and the election must result in a reduction of both the gross estate and the estate tax liability. In practice, it matters when asset values have declined materially in the months after death.

For most readers of this piece, the election is moot. The One Big Beautiful Bill Act, signed July 4, 2025, made the federal estate and gift tax exemption permanent at $15 million per individual and $30 million per couple, indexed for inflation, effective January 1, 2026. The 2026 sunset that estate planners spent 2024 and 2025 preparing for did not arrive. An inherited $3M or $5M brokerage account, absent a much larger estate behind it, will not trigger a federal return and will not face the §2032 question at all. Roughly eighteen jurisdictions continue to impose state-level estate or inheritance taxes, often at lower thresholds; readers in those states, or those whose total estate approaches the federal exemption, should flag the election for a tax professional rather than try to reason through it alone.

Why the portal is wrong for a while, and why that's ordinary

Custodian cost-basis systems do not update automatically on notice of death. The decedent's basis persists — on the summary page, in the tax-lot detail, in the unrealized-gain column, in any downloadable report — until someone on the custodian's side triggers the revaluation. The trigger is usually the opening of a successor account in the inheritor's name and the submission of documentation: a death certificate, letters testamentary or a trust certification, and in some cases a brokerage-specific step-up request form.

This lag is ordinary. It is not a mistake the inheritor made. Custodians process a significant volume of these transitions, and the back-office workflow tends to be deliberately careful rather than fast. But it means that any decision taken off the portal's numbers, during the weeks between death and full reconciliation, is being made on a basis the system itself will later disagree with.

The ninety-day window, plainly

The useful posture in the first three months is restraint. Very little needs to happen. A few things should.

First, every custodian holding inherited assets should be asked, in writing, for a date-of-death valuation on each position. The request creates a paper record and triggers the cost-basis update if it has not already been queued.

Second, the inherited account should be opened in the correct registration. "Transfer on death" distributions and inherited account registrations are different things, with different documentation requirements and different reporting paths. Getting this wrong adds weeks.

Third, the new cost basis should be verified at the lot level, not just the position level. A decedent who accumulated a position over twenty years may have forty tax lots; the step-up applies to all of them, but only if the custodian has recorded all of them.

Fourth — and this is the one that gets underweighted — the inventory should be read before anything is sold. Appreciated positions that the inheritor might instinctively want to rebalance out of are, after the step-up, not particularly appreciated anymore.

Consider an illustrative case. A $3 million taxable account holds roughly $1.2 million of embedded gain at the date of death — a portfolio that has compounded at a reasonable pace over fifteen or twenty years. Under §1014, the entire $1.2 million of appreciation resets, and the inheritor's new basis on those lots is approximately $3 million. The appreciation that was going to be taxed — to the decedent in life, or to the inheritor on eventual sale under the old basis — is simply no longer a taxable gain.

The qualification matters. The step-up applies to appreciation that occurred before the date of death. It does not apply to appreciation that occurs after. If the same portfolio runs from $3 million to $3.3 million in the six months between the date of death and the first sale, that $300,000 is new gain, with a new holding period, and is the inheritor's responsibility.

These figures are illustrative, not a promise about any particular portfolio.

Two mistakes that get made in month one

The first mistake is selling before the new basis has been loaded. The trade clears against the decedent's old basis, the 1099 reports a gain that no longer exists, and the correction — which is possible — requires the custodian to reissue the tax form and the filer to either delay the return or amend it later. It is recoverable. It is also avoidable.

The second mistake is subtler. An inheritor looks at the portfolio, notices a concentrated position that was clearly held too long, and moves to trim it on the reasonable theory that the decedent should have diversified. The trim executes. The 1099 arrives the following January showing very little gain, because the basis has been stepped up in the interim — and the inheritor realizes, slightly deflated, that the tax considerations they had been managing around no longer applied. No harm is done; no tax is owed that shouldn't be. But the reasoning was wrong, and the same reasoning, applied to a different asset with a different holding period, might have produced a real and avoidable tax bill. The lesson is to read the inventory before acting on intuitions formed during the decedent's lifetime.

A question worth asking

Before anything is sold from an inherited account: what date-of-death valuation has the custodian recorded on every lot, and has that valuation been reconciled with the cost basis the portal is currently displaying?

The honest answer is usually not yet requested, not yet received, or not yet matched. That answer is the whole piece.

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If you have recently inherited a taxable portfolio — or are beginning to manage one on a surviving spouse's behalf — the Check is a six-question diagnostic designed to surface the kinds of leaks discussed here, before anything irreversible has been sold. It takes a few minutes and requires no account numbers.