What happens if a donee dies more than one year after receiving a gift?

When a donee receives a gift and holds onto it for more than one year before their death, that gift may qualify for a step-up in basis at the time of the donee's passing. A step-up in basis means that the value of the asset is adjusted to its fair market value at the time of the donee’s death, rather than the original purchase price paid by the donor. This adjustment is beneficial for the heirs because it reduces the capital gains taxes that may be owed if the asset is sold.

For example, if a donee received stock as a gift with an original cost basis of $10,000, but the stock has appreciated to $15,000 at the time of the donee's death, the heirs would inherit the stock with a basis of $15,000. This would minimize the taxable gain if the stock was sold.

In contrast, if the donee were to die within one year of receiving the gift, the original basis from when the gift was made (not the stepped-up value) would generally apply. This makes the concept of timing very important in estate planning.