You have spent years afraid to sell your company stock because of the capital gains tax, and somewhere along the way you assumed your heirs would inherit that same problem. For a Bay Area tech household sitting on a position that has grown five or ten times over, that assumption is usually wrong, and the gap between what you fear and what actually happens can run into hundreds of thousands of dollars.
The reason is a piece of the tax code almost no one explains to the people it helps most. When you hold a highly appreciated asset until you die, the enormous built-in gain your family would otherwise owe tax on can simply vanish. And yet the same code quietly punishes a well-meaning move many parents make too casually, handing that stock to their kids while they are still alive.
This piece is about the difference. We will cover the step-up in basis at death, why lifetime gifting often backfires on appreciated stock, the point at which a second and larger tax appears, and the tools and people you need to make a plan hold together.
The step-up in basis is the reward you were never told about
When you die holding an appreciated asset, your heirs generally inherit it with a cost basis reset to its value on the date of your death. The technical name is a step-up in basis. The practical effect is that the gain that built up across your lifetime is wiped clean for tax purposes.
Picture the RSUs you started collecting years ago at a fraction of today’s price, or the pre-IPO shares you exercised when the strike was almost nothing. Sell that stock today and you face a large long-term capital gains bill, plus the surtaxes that hit high Bay Area incomes. If your heirs inherit it instead, they can often sell the next day and owe little or no capital gains tax, because their basis is the value on the day they received it.
For a married couple in California the picture can be even better, because community property rules can step up the full value of a jointly held position when the first spouse dies, not just half. The exact treatment depends on how your accounts are titled, so confirm it rather than assume it. But the headline holds. For concentrated, deeply appreciated stock, dying while holding it is one of the most tax-efficient outcomes available.
Gifting the stock away keeps the low basis attached to it
Here is where good intentions go sideways. Many parents assume that giving appreciated stock to their children during life is a generous head start. On highly appreciated shares, it often hands the tax problem to the next generation instead of solving it.
When you gift an asset, the recipient generally takes your cost basis along with it. This is called carryover basis. Your child inherits not just the shares but the entire built-in gain, and when they eventually sell, they owe the capital gains tax you were trying to avoid. Compare that to the step-up they would have received by inheriting the same shares at your death, and the gift can quietly cost the family a great deal.
There is also an annual amount you can give each person each year without filing a gift tax return or touching your larger lifetime exemption. That figure changes periodically, so confirm the current number before you lean on it. The point is not that gifting is wrong. It is that gifting appreciated stock specifically deserves a second look, because the asset you feel best about giving is often the one your heirs would rather inherit later.
Do not let a future step-up justify dangerous concentration now
The step-up creates a tempting logic. If holding until death erases the gain, why ever sell? For a Bay Area tech household, that logic can be quietly dangerous.
A step-up your heirs might receive decades from now is worth very little if the single stock it applies to falls seventy percent before then. A concentrated position in one company carries a real risk of permanent loss that no tax benefit can offset. We have made the case before that holding a concentrated position is not a strategy, and that the share of your net worth tied up in employer stock deserves a hard limit.
The resolution is to hold both ideas at once. Trim the position down to a size you could survive losing, using the tax-aware techniques from selling concentrated stock without a giant tax bill, and then let a sensibly sized, long-held slice ride toward the step-up. The estate benefit is a reason to be thoughtful about which shares you sell first, not a reason to bet your family’s security on one ticker.
When your estate is large enough, a second tax appears
Everything above concerns income tax, the tax on the gain. There is a separate tax to understand, the federal estate tax, and it works on an entirely different axis.
The federal estate and gift tax system gives each person a large lifetime exemption. Below it, no federal estate tax is owed. Above it, the value of your estate can be taxed at a high rate before it reaches your heirs. That exemption is generous today, but it is a moving target and is scheduled to change, so treat the current figure as something to verify with a professional rather than settled fact. California, for its part, has no state estate or inheritance tax, though that too is worth confirming.
This is the axis where lifetime gifting flips from questionable to useful. For a household whose equity has pushed it near or above the exemption, giving assets away during life, and letting future appreciation grow outside the estate, can lower the estate tax later. That is a genuine tradeoff against the step-up, and it rewards a projection built around your actual numbers.
Where life insurance fits, and the questions to ask
For estates large enough to owe estate tax, a specific problem shows up. The tax is generally due in cash within months, and much of the wealth may be locked in stock the family does not want to dump under a deadline. Life insurance is one tool people use to supply that liquidity.
I am a fee-only advisor, which means I do not sell insurance and have no product to place. So take this as education, not a recommendation. The concept is that a policy can pay out cash to cover an estate tax bill, which lets your heirs keep the appreciated stock and its step-up instead of selling in a hurry.
If insurance enters your planning, ask how the coverage is owned, because a policy owned the wrong way can be pulled back into your taxable estate and defeat its own purpose. Ask what the coverage costs over time, how long it lasts, and what happens if you stop paying. Ask whether you need it at all, since a household comfortably below the exemption may not. Those are questions for a fee-only advisor and an estate attorney together, not for whoever is trying to sell you the policy.
The paperwork is real, and it is an attorney’s job
None of this happens through good intentions or a spreadsheet. The step-up, the gifting strategy, and the estate tax planning all run through legal documents, and drafting them is the work of a qualified estate attorney, not a do-it-yourself project.
A will directs who receives what. A revocable living trust can keep your estate out of the slow, public probate process California is known for, and can hold your appreciated stock so it passes cleanly. For larger or more complex situations other trust structures exist, but which one fits and how it is written are legal questions with real consequences if handled wrong. That is the attorney’s job. My role is to help you walk in knowing what to ask for.
One piece you can and should check yourself is your beneficiary designations. Retirement accounts and many brokerage accounts pass by beneficiary form, not by your will, and an out-of-date form can route assets to the wrong person no matter what your documents say. We cover the foundational documents every household in its thirties should have, and what happens to unvested equity at death or disability, in companion pieces. Your financial plan and your legal documents have to point in the same direction.
The bottom line
The instinct to never sell your appreciated stock is half right for the wrong reason. Holding a sensibly sized position until death can hand your heirs a clean step-up and erase a lifetime of built-in gain, while gifting that same stock during life often passes the tax bill along with it. Above a certain estate size the calculus shifts, and lifetime gifting and trusts start to matter. Get the concentration risk under control first, then let an estate attorney and a fee-only advisor turn the rest into documents that actually hold.