She Gave the Grandkids Cash for Their Down Payments and Left Them the Stock in Her Will. Done the Other Way Around, the IRS Would Have Collected $120,000 on the Same Two Gifts

She Gave the Grandkids Cash for Their Down Payments and Left Them the Stock in Her Will. Done the Other Way Around, the IRS Would Have Collected $120,000 on the Same Two Gifts

David Beren

Sun, September 13, 2026 at 2:44 PM GMT+3 5 min read

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Quick Read

• Bequeathing Apple (AAPL) and Microsoft (MSFT) shares instead of gifting them spares heirs $120,000 in capital gains taxes on a decade of embedded appreciation.

• Gifted stock carries your original basis to heirs, who owe capital gains on all lifetime appreciation; inherited shares reset to date-of-death value, erasing the bill.

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If you own a taxable brokerage account with shares you've bought and held for decades, the tax code has quietly wired a six-figure gift into your estate plan. It's called the step-up in basis, and the grandmother in the headline used it perfectly: cash to the grandkids for their down payments while she was alive, and the appreciated stock left to them in her will. Reverse the order (gift the stock now, leave the cash later), and the IRS collects on every dollar of appreciation the shares racked up during her lifetime.

Why the Order of the Gifts Changes the Tax Bill

When you die owning appreciated stock, your heirs' cost basis resets to the fair market value on the date of your death. Every dollar of unrealized capital gain you accumulated over your lifetime vanishes for tax purposes. Sell the shares the next day, and you owe essentially no capital gains tax.

A lifetime gift works the opposite way. Hand shares to a grandchild while you are alive, and your original purchase price travels with the stock. When they sell, they owe capital gains tax on every dollar of appreciation since you first bought it.

Take a grandmother who bought Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) a decade ago. Apple is up 1,246.08% over the past ten years, and Microsoft is up 887.35%. Almost the entire position is embedded gain. Gift those shares during life, and heirs inherit that tiny basis. Bequeath them at death, and the basis resets to roughly $332.27 and $495.63 per share. On two blue-chip lots that size, the difference easily runs into six figures of federal capital gains tax.

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Two Code Sections That Do the Heavy Lifting

The step-up rule lives in IRC §1014. The carryover-basis rule for lifetime gifts lives in IRC §1015. Both have been on the books for decades, and both survived last summer's tax overhaul. Under the One Big Beautiful Bill Act, the lifetime estate and gift tax exemption was made permanent at $15,000,000 per individual for decedents dying in 2026.

Who Gets to Use This and Who Does Not

Any U.S. taxpayer holding appreciated capital assets in a taxable brokerage account qualifies, individually or jointly. Community property states give the surviving spouse a full step-up on both halves of jointly owned assets, an even sweeter break. Retirement accounts do not get a step-up. Traditional IRAs, 401(k)s, and 403(b)s pass to heirs with their original tax character intact, meaning ordinary-income tax when the money comes out. Annuities and previously gifted assets are also excluded from §1014 treatment.

Five Steps to Split Your Estate the Right Way

1. Segregate the buckets. Use cash, money-market funds, or freshly purchased shares for lifetime gifts. Bequeath the deeply appreciated positions in your will or living trust.

2. Stay inside the annual gift exclusion: $19,000 per recipient in 2026, per IRS Revenue Procedure 2025-32. Married couples can jointly give $38,000 to each grandchild with no filing required.

3. Track your lifetime exemption. Gifts above the annual exclusion eat into your $15 million lifetime shield and require Form 709.

4. Keep meticulous cost-basis records so heirs can document the step-up on the date-of-death valuation.

5. Review your state rules. Massachusetts, Oregon, Washington, and several others impose separate estate or inheritance taxes at thresholds far below the federal number.

Where This Strategy Blows Up

You must hold the appreciated stock until death for §1014 to apply. Sell it the year before you die, and you pay capital gains tax at federal rates of 0%, 15%, or 20% depending on income. Gift it and §1015 kicks in, sticking your heirs with your basis. Estates above the $15,000,000 exemption owe federal estate tax at rates up to 40%, which can swallow the capital-gains savings whole.

And step-up applies only to assets includible in your gross estate, so anything you already gifted, anything sitting in a retirement account, and anything held inside an irrevocable trust structured to escape estate inclusion is on its own. The order of your gifts does more work than your investment picks (we include the full estate checklist, beneficiary forms, and account titling in a free report here).

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Now you can learn the strategies wealthy retirees use to fund their retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide today! (sponsor)

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