Optimizing Asset Disposition for Inheritance: A Quantitative Analysis of the Critical Loss Rate and Stepped-Up Basis

Long-term investors holding highly appreciated concentrated assets face a trade-off between immediate realization of capital gains taxes and continued tax deferral in anticipation of the stepped-up basis treatment at death. This paper develops an analytical model for evaluating that trade-off. We derive a closed-form expression for the critical annual loss rate an appreciated asset can sustain over a given inheritance period while leaving the investor indifferent between immediate sale and continued holding. The model extends the cost of procrastination literature developed in Sosner (2022) by incorporating the possibility that unrealized gains may ultimately avoid capital gains taxation through stepped-up basis treatment. Simulations illustrate how the tolerable rate of depreciation varies with the inheritance period, tax rate, and opportunity cost of capital. The results highlight the interaction between deferred taxation, concentration risk, and wealth preservation in intergenerational portfolio decisions.