As Nic and Adam have already mentioned, when a person passes away, under CURRENT tax law, the value of all items in their estate are stepped-up in tax basis to their current FMV on the person's date of death. Or as Adam alluded to, there is also the possibility to select an alternative valuation date. However, you can't take such a simple statement as always true.
The Executor of a deceased person's estate can make such an election to have items in the estate that are distributed, sold, exchanged, or otherwise disposed of within six months of the decedent's date of death, valued at their FMV on the date of such distribution, disposal, etc. Any items in the estate that are not distributed, sold, exchanged, or otherwise disposed of within that same six-month period after the decedent's date of death get valued at their FMV on the last day of that six-month period instead. To be able to make this alternative valuation election though, it must be remembered that is covers a person's entire estate, it can not be used apply it to only certain assets that you pick and choose. It covers the entire estate, or none of the estate at all. Also, the alternative valuation date election can only be made if it ends up reducing the estate's overall value and the estate taxes imposed on it. If a decedent's estate doesn't end up owing any federal estate tax, it can't make the alternative valuation date election.
And for the vast majority of people on Net54, I'm guessing you won't have to worry about this at all. Similar to the Standard Deduction we all got on our annual federal income tax returns where the first $XXXX of taxable income we make every year is exempt from federal income tax, there is a somewhat similar federal inheritance estate tax exemption that every U.S. citizen has. And like the Standard Deduction, it is subject to change each year, usually going up. Under current tax laws, this exemption amount for everyone in 2023 is $12.92 million. And if you're married, your estate can most likely take advantage of a doubled exemption of $25.84 million then. So for most of us, no need to even think about an Alternative Valuation Date.
So, for those of you to maybe better understand, the reasoning behind the Stepped-Up Basis concept is that a person's estate is subject to federal inheritance tax (and some state inheritance taxes as well) based on the value of their total estate, less some allowable expenses/deductions that I'm not even going to try and get into. Once those estate assets have been subjected to this federal estate tax, the tax basis of those estate assets then transferred over to the decedent's heirs is considered that same current FMV so as not to subject those assets and heirs to potential double taxation. In other words, if Grandpa bought some stock for $1 a share, and it was worth $100 a share when he died, for federal estate tax purposes it gets valued and taxed at the then current FMV of $100 a share. Now if they forced a grandchild that was left that stock to continue using their deceased Grandfather's $1 per share tax basis, then when they sold it for $100 a share, they'd end up having to pay tax on that $99 gain, basically taxing that stock a second time. That is what is meant by double taxation. So instead, the grandchild gets a new, stepped-up tax basis equal to the $100 a share they originally used to tax the Grandfather's estate for that stock. So now in the future, the grandchild would only have to pay tax on gain if they sold that stock for more than $100 a share. And if the stock price dropped and it ended up being sold for less than $100 a share, the grandchild could recognize the loss and use that to offset other income on their income taxes.
The main thing people need to realize and remember is that these only represent CURRENT tax laws. These can, and do, change over time. The federal estate tax exemption is at an all-time high and has more than doubled since Trump took office. In fact, many may remember one of his opponent, Hillary Clinton's, campaign goals/proposals was to reduce this federal estate tax exemption down to just $1 million, an amount which would have made an enormous number of people's estates liable for federal estate taxes since then. I actually had clients where we had discussed and made plans to immediately initiate changes to their estates and planning should Hillary win the election. And right after Biden took office, do any of you remember some of the proposed ideas he and his administration were supposedly tossing around about again reducing the federal estate tax exemption amount, and possibly even doing away with the stepped-up tax basis of inherited assets?
Here is a look at the current 2023 tax brackets and rates for federal estate tax purposes, with a top rate of 40%. Given the value today of people's homes, 401K/pension accounts, and even some card collections, having an estate value of $1 million is not that impossible to reach. Keep that in mind if future administrations ever do decide to cut the federal estate tax exemption, and/or do away with the stepped-up basis rules.
https://smartasset.com/taxes/all-about-the-estate-tax
The main thing to remember is that if you think you're going to have an estate with a significant value at some point, keep an eye on the federal estate tax laws and rules in place, and any proposed or actual changes to them in the future. Looking to talk with a licensed, knowledgeable tax professional may also be a good (and more often necessary) idea to assist in estate planning and/or any questions you may have. Remember, there is no perfect, exact, one size fits all, answer to people when it comes to their tax and estate questions and issues. Everyone has a completely different and unique tax and estate situation, and you need to look at ALL aspects and components of each person's tax/estate situation before ever even beginning to think you can properly start to answer all their questions.
Oh, also remember, if you decide to gift cards to someone while still living, your tax basis carries over to the person you're giving them to. In my Grandpa story above, that means the grandkid has the same $1 per share tax basis in the stock that Grandpa did. Only if you wait to let a card be inherited by someone do they get the basis step-up. There is some more I could go into and explain about the pros/cons of gifting versus inheriting, and how gifting can also affect one's federal estate tax exemption, but all the TLDR people with the ASOAG are probably getting ready to pounce!