Step-Up in Basis
When you inherit an asset, its tax basis is 'stepped up' to its fair market value at the date of death. This eliminates capital gains tax on any appreciation that occurred during the deceased person's lifetime.
Legal Definition
Under IRC ยง1014, the adjusted basis of property acquired from a decedent is the fair market value of the property at the date of death (or alternate valuation date), effectively eliminating unrealized capital gains accrued during the decedent's lifetime.
Practical Example
Dad bought stock for $10,000. When he dies, it's worth $100,000. His daughter inherits it with a stepped-up basis of $100,000. If she sells it for $105,000, she only pays capital gains tax on $5,000, not $95,000.