A married couple in their late seventies sitting on $1.6 million in a taxable brokerage account, with a cost basis of just $300,000, faces a quiet but expensive decision every time they think about funding a kitchen remodel, a new car, or a long trip. Selling the appreciated shares feels logical because that is where the money is. The tax code, however, treats those same shares very differently depending on whether they are sold during life or held until death.
This is the situation thousands of retirees stumble into without realizing the cost. On forums like Bogleheads and r/personalfinance, you can find near-identical posts from adult children asking whether mom and dad should sell down the old Exxon, GE, or index fund position to pay for assisted living. The intuitive answer (sell what you have, preserve the IRA) is usually backwards.
The numbers behind the decision
- Ages: 78, married filing jointly
- Taxable brokerage value: $1.6 million
- Cost basis: $300,000
- Embedded long-term gain: $1.3 million
- Core question: sell to spend, or hold for heirs?
Why IRC §1014 is the whole ballgame
The single rule that dominates this decision is the step-up in basis under IRC §1014. When an owner dies, the cost basis of most capital assets resets to the fair market value on the date of death. Heirs inherit the shares at that new basis. Decades of embedded gain simply vanish for tax purposes.
The math is blunt.
If this couple sells the $1.3 million of gain during their lifetime, they face roughly 15% to 20% federal long-term capital gains tax, plus the 3.8% net investment income tax, plus state tax (assume 5%). Combined bill: about $320,000. If they hold instead, heirs sell the same shares the next week at zero gain. After accounting for roughly $30,000 of additional estate-related friction, the net family savings are about $290,000.
Federal estate tax is not the constraint here. The 2026 basic exclusion amount is $15,000,000 per decedent, so a couple worth a few million sits comfortably below the line. The step-up is essentially a free transfer of basis that the IRS hands to heirs.
Three paths that actually move the result
- Spend pre-tax dollars first. Withdrawals from a traditional 401(k) or IRA are taxed as ordinary income, whether the owner uses them or an heir does. These accounts do not get a step-up. Drawing from them first while letting the brokerage shares ride is the cleanest way to fund retirement without burning the basis reset.
- Gift cash, not appreciated stock, to children. The 2026 annual gift exclusion is $19,000 per recipient under IRC §2503(b). Gifting appreciated shares transfers the low basis along with them. Heirs lose the step-up on whatever is gifted. Cash gifts preserve the future basis reset for the larger position.
- Know your state. In community property states (California, Texas, Washington, and others), the entire community-property portion of an asset gets a full step-up at the first spouse’s death, not just half. That is a meaningful planning advantage worth confirming with a state-specific advisor before retitling anything.
What to do this month
Pull the cost basis statement from every taxable account and identify which lots carry the largest embedded gains. Those are the lots that should be the last thing sold, ideally never sold by the original owners. Then rank withdrawal sources in this order for funding ongoing spending: required minimum distributions first, then traditional IRA or 401(k) dollars, then taxable cash and low-basis holdings, then long-held appreciated shares.
The common mistake is treating a brokerage account as the “easy” source because no withdrawal paperwork is required. At 23.8% combined federal capital gains plus NIIT (Net Investment Income Tax), selling a low-basis position to avoid a 24% IRA withdrawal is roughly a wash today and an expensive choice for the next generation. The step-up is one of the largest tax benefits in the code. Letting it work requires nothing more than not selling.
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