John Crow 
One of the most important and misunderstood tax concepts in estate planning is the step up in basis. For many Kentucky families, understanding how the step up in basis works can mean the difference between preserving wealth and paying unnecessary capital gains taxes.
This issue becomes especially important for married couples who own appreciated assets such as real estate, investments, or a closely held business. Below is a clear explanation of what the step up in basis is, how it works under Kentucky law, and why proper estate planning matters.
What Is a Step Up in Basis?
In simple terms, basis is what you paid for an asset, adjusted over time for things like improvements or depreciation. When an asset is sold, capital gains tax is generally owed on the difference between the sale price and the basis.
A step up in basis occurs when certain assets are revalued to their fair market value at the time of a person’s death. This adjustment can significantly reduce or even eliminate capital gains taxes for heirs or surviving spouses who later sell the asset.
Why the Step Up in Basis Matters
Many Kentucky families hold assets for decades. Over time, these assets often increase significantly in value.
Common examples include:
- A family home purchased many years ago
- Rental or investment real estate
- A family-owned business
- Long term investment portfolios
Without a step up in basis, selling these assets can result in large capital gains tax liabilities. With proper planning, much of that tax exposure can be avoided.
How the Step Up in Basis Works in Kentucky
Kentucky follows federal income tax rules regarding basis adjustments at death. While there is no Kentucky inheritance tax for surviving spouses or lineal descendants, capital gains taxes can still apply if assets are later sold.
When an individual dies:
- Assets included in their estate generally receive a new basis
- The new basis is equal to the fair market value at the date of death
- Future capital gains are measured from that new value
This is where ownership structure becomes critically important, especially for married couples.
Step Up in Basis for Married Couples
Many married couples in Kentucky assume that owning assets jointly means everything receives a step up in basis when one spouse dies. That is not always the case.
In many common ownership arrangements:
- Only the deceased spouse’s portion receives a step up in basis
- The surviving spouse’s portion retains its original basis
This partial step up can still leave the surviving spouse with substantial capital gains exposure if assets are later sold.
Advanced estate planning strategies can improve these outcomes, particularly when the goal is flexibility for the surviving spouse.
Example One: The Family Home or Investment Property
Consider a Kentucky couple who purchased a home or rental property many years ago for $200,000. Over time, the property increases in value to $600,000.
If one spouse dies:
- The deceased spouse’s share receives a basis adjustment
- The surviving spouse retains the original basis on their portion
If the surviving spouse later sells the property, capital gains tax would still apply to the sale.
With proper estate planning, the full value of the property can often be positioned to receive more favorable tax treatment.
Example Two: Business Ownership and the Step Up in Basis
Now consider a married couple who own a closely held business that has grown substantially over the years.
Common concerns include:
- Selling the business after retirement
- Selling the business after the death of a spouse
- Providing liquidity for the surviving spouse
If only part of the business receives a step up in basis, a future sale may trigger significant capital gains taxes. For Kentucky business owners, basis planning is often just as important as succession planning.
Example Three: Stocks and Investment Accounts
Now consider a Kentucky married couple who invested heavily in stocks and mutual funds over many years. They purchased shares gradually through taxable brokerage accounts, often reinvesting dividends and holding positions long term.
Assume the following:
- Original investment cost of $300,000
- Current market value of $1,200,000
- Significant unrealized capital gains
- Assets held in a taxable investment account
If one spouse dies and the investments are structured so that only part of the account receives a step up in basis, the surviving spouse may still face substantial capital gains taxes when selling appreciated stock positions.
For example:
- Only the deceased spouse’s portion receives a basis adjustment
- The surviving spouse’s portion retains the original purchase price
- Selling shares later could trigger capital gains taxes on decades of appreciation
With proper estate planning, investment assets such as stocks can often be positioned so that the basis is adjusted to fair market value at death. This allows the surviving spouse or heirs to sell investments with reduced or eliminated capital gains tax exposure.
This planning is particularly important for families who:
- Hold concentrated stock positions
- Own long term growth investments
- Plan to rebalance or liquidate investments after a spouse’s death
Investment accounts are often overlooked in estate planning, but they can represent one of the largest sources of capital gains tax if not properly coordinated with the overall plan.
Common Misunderstandings About the Step Up in Basis
Many families mistakenly believe:
- A will alone controls tax outcomes
- Joint ownership guarantees full tax benefits
- Estate taxes and capital gains taxes are the same
- Tax planning only matters for very wealthy families
In reality, capital gains tax planning affects families at many wealth levels, especially those who own real estate or businesses.
How Estate Planning Can Improve Step Up in Basis Outcomes
Proper estate planning is not just about who receives assets. It is also about how assets are owned and structured during life.
Effective planning may involve:
- Preparing Community Property Trusts for asset ownership
- Reviewing how real estate is titled
- Planning for post death sales
- Using advanced trust strategies when appropriate
These steps can help ensure that assets receive the most favorable tax treatment available under current law.
When Kentucky Families Should Review Their Plan
You should consider reviewing your estate plan if you or your spouse:
- Own appreciated real estate
- Own a family business
- Expect to sell assets after one spouse’s death
- Have not reviewed your plan in several years
- Created documents before acquiring significant assets
Estate plans that are outdated or incomplete often miss important tax planning opportunities.
Final Thoughts
The step up in basis is one of the most powerful tax benefits available to Kentucky families, but it does not apply automatically in every situation. Ownership structure, planning choices, and timing all matter.
With proper guidance, families can reduce capital gains taxes, preserve wealth, and provide greater flexibility for surviving spouses and future generations.
Contact a Kentucky Estate Planning Attorney
At Crow Estate Planning & Probate, PLC, we help Kentucky families understand and implement estate planning strategies that address both legal and tax concerns, including planning around the step up in basis.
If you want to ensure your estate plan is structured to minimize capital gains taxes and protect long term wealth, schedule a consultation with a Kentucky estate planning attorney at Crow Estate Planning & Probate, PLC. Our firm focuses on estate planning and probate, allowing us to provide thoughtful and precise guidance tailored to Kentucky families.
About the Author
John Crow is the founder, owner, and principal attorney of Crow Estate Planning and Probate, PLC. With over a decade of legal experience in the areas of estate planning, probate, conservatorships, guardianships, and business planning, he serves clients in the greater Middle Tennessee and Western Kentucky regions. He obtained his Bachelor of Arts degree in History from Vanderbilt University, then later received his Juris Doctorate from the Cumberland School of Law at Samford University. He is a lifelong Clarksville resident and is honored to have helped so many families over the years. Learn More.
Licensed in Tennessee and Kentucky