Washington, D.C. — Treasury Department officials proposed a regulation on May 12, 2026 that would cap the amount of basis increase that can pass at death at $3 million per decedent (and $6 million for married couples that properly elect portability). The regulation’s 60‑day public comment period closed on July 11, 2026; as of Oct. 5, 2026 Treasury has not published a final regulation in the Federal Register. The proposal would take effect for decedents dying on or after Jan. 1, 2027, if finalized as proposed. The measure is intended to limit the elimination of built‑in capital gains for very large unrealized positions while preserving relief for smaller estates.

Context: why the rule matters

Under longstanding tax practice, appreciated assets that pass at death generally receive a full "step‑up" in basis to fair market value, removing built‑in capital gains from heirs’ future tax bills. The Treasury proposal would instead allow a maximum aggregate basis increase of $3 million per decedent, with unused basis increase lost (unless portability doubles the amount for surviving spouses who elected portability on an estate tax return). For estates with concentrated, long‑held appreciation — family stock positions, private companies, or real estate portfolios — the change materially raises post‑death capital‑gains exposure.

Current status and immediate timeline (Oct. 2026)

  • May 12, 2026 — Treasury published the proposed regulation and opened a 60‑day comment period.
  • July 11, 2026 — Comment period closed; Treasury’s public docket contains submissions from tax practitioners and professional organizations.
  • Oct. 5, 2026 — Treasury has not issued a final rule; practitioners continue to model under the proposed $3M/$6M cap while watching for Treasury or IRS guidance that could alter scope, allocation methods, or anti‑abuse rules.

Updated details and real‑world examples

The tax math in the proposal remains unchanged from the May draft: federal long‑term capital‑gains tax is still 20% at the top rate, and the 3.8% net investment income tax (NIIT) applies where income thresholds are met — a roughly 23.8% federal effective rate before state tax on long‑term gains. That baseline translates into larger dollar liabilities for high unrealized gains.

Example: a decedent with $10 million of unrealized long‑term gain.

  • Under a $3M cap, $7M of gain would carry over to heirs.
  • Federal tax on that $7M at 23.8% = $1.666M.
  • Add a high state rate (California top combined rate ~13.3%) and the combined effective tax can approach ~37.1% of the carried‑over gain; on $7M that equals ~ $2.597M total tax exposure.

These simple calculations illustrate why executors and advisers need liquidity planning: assets that must be sold to pay taxes can force unfavorable timing and prices.

What tax advisers and taxpayers are doing now (updated best practices)

Even without a final rule, advisers have moved from theoretical modeling to operational changes. Practical steps to prioritize between now and year‑end 2026:

  • Model multiple scenarios: Run client models under the proposed $3M/$6M cap, under a per‑asset vs. aggregate allocation approach, and under state‑tax permutations. Include estate administration sales and post‑inheritance sales by beneficiaries.
  • Confirm portability planning: Portability requires an election on Form 706 filed within nine months of death (with extension). For married couples approaching high asset thresholds, confirm beneficiary instructions and counsel on electing portability if it will increase the available cap for the surviving spouse.
  • Prioritize liquidity solutions: Consider life‑insurance funding or pre‑death sales to create cash to pay post‑death taxes without forced sales. Insurance can be sized to cover projected capital‑gains liabilities modeled under conservative assumptions.
  • Accelerate charitable and grantor trust funding where appropriate: Irrevocable gifts completed in life — charitable remainder trusts (CRTs), charitable lead trusts (CLTs) or donor‑advised fund (DAF) contributions — remove appreciation from the taxable estate and may deliver current income‑tax benefits. Funding a CRT before death preserves its tax‑deferral mechanics and income stream design; funding after death may be more limited.
  • Revisit QSBS and Section 1202 opportunities: Qualified small business stock (IRC §1202) continues to offer significant exclusion benefits (subject to the statute’s $10M/10x limitations). Founders and early investors should reconcile §1202 timing and potential sales against any step‑up cap exposure.
  • Use installment and monetization structures carefully: Installment sales can spread recognition, but advisers should evaluate estate‑inclusion risk and whether a decedent’s death during an installment period changes tax treatment for the seller’s heirs.
  • Strengthen valuation and documentation protocols: Custodians and fiduciaries should have rapid valuation procedures for publicly traded positions and relationships with valuation firms for private assets so basis computations and charitable substantiation are ready during administration.

Operational checklist for advisers and executors — updated

  • Run sensitivity analyses with $3M and $6M caps, including state‑tax overlays.
  • Confirm whether Form 706 portability election will be filed and gather information needed to file on time (9 months, plus any extensions).
  • Size life‑insurance or other liquidity vehicles to cover modeled tax liabilities.
  • Document low‑basis positions and gather historical cost basis records for all significant holdings.
  • Coordinate with legal counsel on irrevocable pre‑death transfers (IDGTs, GRATs) and with valuation firms for private company valuations.

Impact and reactions

Professional organizations and tax practitioners used the July comment window to press Treasury for clarifications: whether the cap is allocated per‑asset or in the aggregate, how portability will operate administratively, anti‑abuse rules for intra‑family transfers near death, and the interaction with existing estate tax computations. Absent Treasury’s final text, most firms are advising conservative planning — act now on transactions that are irreversible and model deferred options carefully.

What to watch next

  • Treasury and IRS publication of a final regulation in the Federal Register — timing uncertain as of Oct. 5, 2026.
  • Whether Treasury adopts per‑asset allocation rules or an aggregate approach, and whether it includes specific anti‑avoidance provisions.
  • Any congressional activity to modify or supersede the regulation; legislative action would change timing and planning priorities.
  • IRS administrative guidance on basis reporting, valuation, and how estates should compute and report the capped basis increase.

Frequently asked questions

Does the $3M cap apply to decedents who died before Jan. 1, 2027?

No. The proposed regulation published May 12, 2026 was written to apply to decedents dying on or after Jan. 1, 2027. Planning for decedents who died earlier is governed by existing law unless Treasury makes a different effective date in a final rule.

How do married couples preserve the $6M limit?

On the proposed rule, married couples can effectively double the cap to $6M only if the surviving spouse elects portability on the deceased spouse’s Form 706. That election must be made on a timely filed estate tax return (generally within nine months of death, though extensions are available).

Should clients sell appreciated assets now to avoid the cap?

Not automatically. Selling during life crystallizes gain and may produce immediate tax at ordinary or preferential rates; in some cases, transfers to CRTs or structured sales preserve tax benefits while removing assets from the estate. Run individualized modeling comparing after‑tax proceeds under a life‑sale versus potential post‑death capital‑gains exposure.

Will state taxes be affected?

Yes. State capital‑gains rates and income tax rules remain material. For clients in high‑tax states (for example, California’s top marginal rates), combined federal and state tax on carried‑over gains can be materially higher than federal alone; include state calculations in modeling.

— Kate Ellison, Tax Planning Expert