NUA and Estate Planning: Step-Up, IRD, and Charitable Strategies

For retiring employees with low-basis employer stock, NUA changes the estate math in ways most generalist advisors miss. This guide covers the mechanics — not a substitute for your own advisor's analysis.

The core issue: what happens to NUA stock at death?

The NUA election under IRC § 402(e)(4) converts the appreciation locked inside your 401(k) employer stock from future ordinary income into long-term capital gain the moment you distribute. That's the basic tax win. But once you hold NUA stock in a taxable brokerage account, a new question arises: what happens to that gain when you die?

The answer has two parts, and the distinction is worth $100,000+ in planning for large NUA positions.

Layer 1: The NUA gain — Income in Respect of a Decedent (IRD)

When you take an NUA distribution, the plan transfers stock to your taxable account. Say you have $1M in employer stock with a $100K cost basis:

• Your brokerage receives the stock with a carryover basis of $100K (what the plan paid).
• The $900K of NUA is automatically long-term capital gain whenever you sell — even one day after distribution.¹
• If you die holding the stock, your heirs inherit that same $100K basis for the NUA portion. They owe long-term capital gains tax on $900K when they sell — reduced by the estate's IRD deduction under IRC § 691(c), which partially offsets the embedded gain.²

The NUA gain never resets. It is locked in as taxable to someone — you or your heirs — just at long-term capital gains rates rather than ordinary income. Versus the IRA-rollover alternative, where heirs pay ordinary income rates on every dollar of withdrawal, IRD treatment of NUA is still favorable: your heirs pay capital gains, not income rates.

Layer 2: Post-distribution appreciation — step-up applies

Any appreciation that occurs after you receive the stock in your taxable account IS eligible for step-up under IRC § 1014.³

Example: You receive NUA stock at $80/share ($10 basis). The stock rises to $150/share before you die.

• NUA layer ($10 → $80): $70/share is IRD. Heirs owe LTCG on this when they sell.
• Post-distribution appreciation ($80 → $150): $70/share gets a step-up to $150 at death — heirs owe zero tax on this layer.³

The practical implication: the longer you hold NUA stock, the larger the post-distribution appreciation layer becomes relative to the locked-in NUA layer — and the greater the estate-planning upside of holding rather than selling.

Comparing NUA vs rollover at inheritance

The $15M estate exemption — how it changes NUA planning

The One Big Beautiful Bill Act (OBBBA, July 2025) permanently raised the federal estate and gift tax exemption to $15,000,000 per person — $30M for a married couple with portability.⁴ For 2026, this is the confirmed figure per IRS Rev. Proc. 2025-67.

What this means for NUA holders:

• If your total estate (including the NUA stock) is well under $15M, federal estate tax is not a primary concern. The NUA-vs-rollover estate analysis focuses purely on income tax to you and your heirs — not estate tax.
• If your estate is near or above $15M (UHNW range), NUA stock held in a taxable account can be partially sheltered using annual gifting ($19,000/recipient/year in 2026), trusts, or charitable strategies.
• State estate taxes vary widely (Oregon and Massachusetts still apply at $1M). Residents of states with low exemptions should model state-level estate tax as well — NUA stock in taxable vs. IRA assets have different exposure.

2026 capital gains rates that apply to NUA stock

NUA is automatically long-term capital gain regardless of holding period after distribution.¹ In 2026, federal LTCG rates apply as follows:⁵

• 0% — single filer taxable income ≤$49,450; married filing jointly ≤$98,900
• 15% — single $49,451–$545,500; MFJ $98,901–$613,700
• 20% — single above $545,501; MFJ above $613,700
• +3.8% NIIT — Net Investment Income Tax on investment income if modified AGI exceeds $200,000 single / $250,000 MFJ (not inflation-adjusted)⁶

Effective NUA tax rate for a retiree with high ordinary income: often 23.8% (20% + 3.8% NIIT) federal. Compare to the marginal 37% ordinary income rate your heirs would pay pulling the same dollars out of an inherited IRA.

Charitable giving with NUA stock

NUA stock is among the most tax-efficient assets to donate to charity. Here's why:

• Direct donation: Donate appreciated NUA stock held over one year directly to a public charity. You claim a deduction equal to full fair market value, recognize no capital gain, and the NUA gain disappears entirely — the charity (tax-exempt) owes nothing.⁷
• Charitable Remainder Trust (CRT): Transfer NUA stock to a CRT. The trust sells without triggering immediate capital gain. You get an income stream for life (or a term of years), a partial charitable deduction upfront, and the charity receives the remainder at your death. Useful for large NUA positions where you need liquidity but want to defer and spread the capital gains.
• Donor-Advised Fund (DAF): Contribute NUA stock to a DAF in a high-income year for an immediate deduction. Recommend grants to charities over time. No capital gains recognized at contribution.

If you plan to make significant charitable contributions in retirement, donate the NUA stock (highest embedded gain) first, and spend other, lower-gain assets for living expenses. This prioritization alone can save tens of thousands in tax over a decade.

Gifting NUA stock to family during life

If you gift NUA stock to family members (adult children, for example), the recipient inherits your cost basis — not the step-up that would apply at death.⁸ The NUA gain stays embedded and the recipient will owe LTCG when they sell.

• Annual exclusion gifts: up to $19,000 per recipient in 2026 (gift tax-free, no reporting required).
• Useful when the recipient is in a lower tax bracket (0% or 15% LTCG) — they can sell and pay far less than you would at 23.8%.
• Not useful as a step-up strategy — gifted assets don't step up at donor's death; only assets still in your estate at death receive the step-up.
• Beware the kiddie tax (IRC § 1(g)): for dependent children under 19 (or full-time students under 24), net unearned income above $2,700 in 2026 is taxed at the parent's rate — gifting NUA stock to minor children and having them sell may not produce the expected savings.

When the NUA + estate plan is optimal

NUA shines most in estate planning when:

• You expect to hold the stock long-term — the post-distribution appreciation layer grows, and each year you hold the more of the ultimate estate is eligible for step-up.
• Your heirs are in a lower bracket than you — even the IRD layer (the NUA gain) gets taxed at their LTCG rate, not yours.
• You have charitable intent — NUA stock is the ideal asset to donate; it wipes out the embedded gain entirely.
• Your estate is under $15M — no federal estate tax concern; the income-tax math dominates, and NUA wins on income tax versus a full-IRA inheritance.

When rollover may be better from an estate-planning perspective

• Your estate is above $15M and you want step-up — IRA assets don't step up at death either, but neither does NUA. However, within a trust-heavy estate plan, your advisor may have other strategies (e.g., charitable remainder trusts, Roth conversions) that integrate better with IRA assets than with NUA stock.
• Your heirs will need to sell quickly — if heirs plan to liquidate immediately, the post-distribution step-up benefit is zero (they didn't hold long enough to accrue post-distribution appreciation), and they face the full NUA IRD gain. The IRA might still be worse (ordinary income), but the gap narrows.
• Concentration risk outweighs tax savings — holding a large, undiversified employer stock position in taxable creates portfolio risk. If your estate-planning goal requires holding the stock long-term to accumulate step-up, you're also carrying that concentration risk for years.

Sources

1. IRS Topic 412 — Lump-Sum Distributions. See also IRC § 402(e)(4) on NUA mechanics and automatic LTCG treatment.
2. IRC § 691 — Recipients of Income in Respect of Decedents. NUA appreciation is IRD; no step-up at death per § 1014(c).
3. IRC § 1014 — Basis of Property Acquired from a Decedent. Step-up applies to post-distribution appreciation (not IRD amounts excluded under § 1014(c)).
4. IRS — Tax Inflation Adjustments for Tax Year 2026 (including OBBBA). $15,000,000 estate and gift tax exemption per person.
5. Kiplinger — IRS Updates Capital Gains Tax Thresholds for 2026. 0%/15%/20% LTCG rate thresholds verified.
6. IRS Topic 559 — Net Investment Income Tax. 3.8% NIIT on investment income above $200K single / $250K MFJ.
7. IRS — Charitable Contributions: Deduction for appreciated stock. See also IRS Pub. 526; FMV deduction, no gain recognition on long-term appreciated property donated to public charity.
8. IRS Publication 551 — Basis of Assets. Gift recipients carry over the donor's basis; no step-up on gifted assets.

NUA estate planning involves interactions between income tax, estate tax, and retirement plan rules. Verified against IRC §§ 402(e)(4), 691, 1014, and 2026 IRS inflation adjustments. Consult a specialist before making the NUA election — it is irreversible.