What Is Stepped-Up Basis and Why It Matters in Estate Planning

Stepped-up basis is one of those topics that comes up a lot when we’re working with farm families on their estate plans. It’s a tax tool that can make a big difference, but like any tool, it’s not the solution for every situation. Let’s dive into what stepped-up basis is, why it’s helpful, and when it might not be the main focus for your plan.

What Is Stepped-Up Basis?

When someone passes away, the value of their assets gets adjusted to match the fair market value at that time. This reset is called a “stepped-up basis” (or occasionally a “step-down basis” if the value has gone down).

For example, let’s say you bought farmland years ago for $3,000 an acre. Today, that same land might be worth $10,000 an acre. If you pass it on to your heirs, the tax basis of the land would reset to $10,000 per acre. If your heirs sell it for $10,000 per acre, there’s no capital gains tax to pay on that $7,000 increase in value.

This can be a big deal, especially for families with farmland or other assets that have appreciated significantly over time.

Why Stepped-Up Basis Can Be a Big Deal

Farmland values in recent years have been on a rollercoaster, but they’ve generally gone up. It’s not uncommon for farmland purchased for $3,000 an acre 20 years ago to be worth $10,000 or more per acre today.

If your heirs inherit that land and plan to sell it, the stepped-up basis can save them a huge tax bill. Without it, they’d owe capital gains tax on the $7,000 per acre increase in value.

And here’s the kicker: stepped-up basis works alongside estate tax exemptions. If your estate’s total value is below Minnesota’s $3 million exemption (or the federal exemption, which is nearly $14 million for individuals in 2025), your heirs can avoid both estate taxes and capital gains taxes.

When Stepped-Up Basis Isn’t the Whole Story

While stepped-up basis is a fantastic tool in the right situation, it’s not always the most important part of a farm succession plan.

  1. What if the Heirs Aren’t Selling?
    If your farming heir plans to hold onto the land, stepped-up basis might not matter much. Tools like lifetime gifting or selling the land at a discount through a contract for deed could make more sense.
  2. Estate Tax Planning
    Gifting land while you’re alive can help reduce the size of your taxable estate. Minnesota doesn’t have a gift tax, so moving assets now could significantly lower or even eliminate your estate tax liability.
  3. Avoiding Family Disputes
    One of the biggest advantages of lifetime gifting or selling is that you get to oversee the transfer. You’ll have the satisfaction of knowing the farm is in the right hands and can address any family dynamics upfront.
  4. Creating Retirement Income
    Selling land to a farming heir on a contract for deed gives you a steady income stream in retirement. It’s also a tax-friendly way to transfer the farm, with capital gains taxes spread out over time.

The Downsides of Over-Focusing on Stepped-Up Basis

When stepped-up basis becomes the sole focus of a plan, it can create problems:

  • Missed Opportunities: Gifting land or selling it at a discount might be the better option for your family, but those ideas can get overlooked if stepped-up basis is seen as the “only” option.
  • Family Challenges: We’ve seen situations where relying too much on traditional estate plans—like just wills or trusts—leads to disputes among heirs after a parent’s passing. Planning ahead with lifetime transfers can avoid some of these pitfalls.

The bottom line? Stepped-up basis is important when we expect land or other assets to be sold, but it’s not the only tool in the estate planning toolbox. Planning for stepped-up basis should be just one of the items your estate planning attorney considers when looking at your farm succession plan. Placing too much emphasis on holding onto land for purposes of obtaining the stepped-up basis can not only lead to missed opportunities but it can also result in unintended consequences.

Let’s Talk About Your Farm’s Future

At Wagner Oehler, Ltd., we believe in making plans that fit your family’s and your farm’s unique needs. Whether stepped-up basis is the right fit for your situation—or whether tools like gifting or contracts for deed make more sense—we’ll help you sort through your options.

We’re here to guide you through life’s most crucial legal decisions, including farm succession planning (check out our video on Farm Succession Planning and subscribe for more content).

Contact us today to schedule a consultation. Keep an eye on our Events page located at: https://www.wagnerlegalmn.com/events/ for farm succession planning events.

The farm is your legacy. Protect it with a plan that works as hard as you do. Farming matters.

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Categories: Estate Planning, Farm