Step-Up in Basis at Death: Estate Planning for Business Owners

You started your contracting company with $50K. It's now worth $5M. If you sell: $4.95M in gain × 25% (federal + state) = roughly $1.24M in taxes.

If you hold until death: your heirs inherit the business at a $5M stepped-up basis. They sell for $5M. Capital gains: zero.

Why This Matters for Contractors

Trade contractors who built businesses from scratch often have very low basis — sometimes near zero. The gap between basis and fair market value represents decades of unrealized gain. Step-up in basis eliminates that entire gain at death.

This doesn't mean you should never sell. But it does mean the timing and method of exit matters enormously. A contractor at age 60 with a $10M business and 20+ years of life expectancy might sell and invest the proceeds. A contractor at 72 with health concerns might transfer ownership to heirs and let step-up work its magic.

Estate Tax Considerations

The current federal estate tax exemption is $13.99M per person ($27.98M per married couple) for 2025. Unless your total estate exceeds this, there's no federal estate tax AND your heirs get stepped-up basis. It's a double benefit.

However: the exemption is scheduled to drop to approximately $7M per person in 2026 under the TCJA sunset. Planning now — especially for contractors with $5M+ in business value — is critical.

This pairs with family ownership shifts, exit planning, and the full tax strategy guide.