The Costly Mistake of Deathbed Sales: Why Selling Appreciated Assets Right Before Death Can Hurt Your Heirs

When a loved one is nearing the end of life, it’s natural to want to put their affairs in order and ensure their assets are distributed as intended. However, one common and costly mistake is selling highly appreciated assets, such as stocks in a brokerage account or their home, right before death, or even gifting them to heirs on a deathbed.

Understanding the Step-Up in Basis

When someone passes away, the cost basis of most inherited assets is "stepped up" to their fair market value on the date of death. This means that if heirs inherit appreciated assets, such as stocks or a home, they receive them at the current market value, not the original purchase price. If they sell the assets soon after inheriting, they may owe little or no capital gains tax.

Example:
Suppose you purchased 1,000 shares of stock at $10 each ($10,000 total). At your death, the shares are worth $75 each ($75,000 total). If your heirs inherit the shares and sell them immediately for $75,000, they owe no capital gains tax because their basis is "stepped up" to $75 per share.

What Happens If You Sell or Gift the Assets Right Before Death?

If you sell the appreciated assets just before death, you realize the capital gains yourself, triggering a tax bill on the difference between the original purchase price and the sale price. If you gift the assets to your heirs while still alive, even minutes before death, they receive your original cost basis, known as a "carryover basis." When they sell, they owe capital gains tax on the entire appreciation during your ownership.

Example:
You bought Apple stock for $10 per share, and it's now worth $100 per share.

• If you gift the stock to your son the day before you die: He receives your $10 per share basis. If he sells at $100, he owes capital gains tax on $90 per share.
• If he inherits the stock after your death: His basis is $100 per share. If he sells at $100, he owes zero capital gains tax.

Example: The $100,000-to-$1 Million Home

Suppose you purchased your home for $100,000 three decades ago. Today, it’s worth $1 million.

Scenario 1: Deathbed Gift

• You gift the home to your child while you’re still alive.
• Your child’s basis is $100,000 (your original purchase price).
• If your child sells the home for $1 million, they realize a $900,000 capital gain.
• They owe capital gains tax on the entire $900,000 appreciation.

Scenario 2: Inheritance

• You keep the home until your death and leave it to your child in your will or trust.
• Your child’s basis is "stepped up" to $1 million (the home’s value at your death).
• If your child sells the home for $1 million, there is no capital gain, and no capital gains tax is owed.

While it may feel urgent to transfer assets to loved ones as life nears its end, gifting appreciated property like a home right before death can be a costly mistake. Letting heirs inherit the property preserves the step-up in basis and maximizes the value they receive. Always consult with an estate planning professional before making major decisions about your assets near the end of life.

Disclaimer: The information provided on this website is for general informational and educational purposes only and does not constitute tax, legal, or accounting advice. I am not a licensed tax advisor and nothing on this site should be relied upon as tax advice for your specific situation. Tax laws are complex, subject to change, and can vary based on individual circumstances. You are strongly encouraged to consult with a qualified tax professional or advisor before making any decisions or taking any actions based on the information provided here. By using this website, you acknowledge and agree that I am not responsible for any tax consequences that may arise from your use of the information contained herein.