Tax Alpha Insider
Subscribe Brent Sullivan About
Direct Indexing

Is step-up in basis like free life insurance?

An analogy from Jeffrey/Arnott's 1993 classic paper

Brent Sullivan· · 4 min read
Cartoon comparing the step-up in basis at death to a free life insurance payout, drawn from a 1993 paper

The power of tax deferral… at Basis Northwest.

Two big announcements coming this week. Stay updated

Jeffrey and Arnott’s Is Your Alpha Big Enough To Cover Its Taxes? (1993) classic paper is about the relationship between turnover and tax efficiency.

Strategies that depend on turnover often underperform pretax (though there are exceptions), and the authors put the nail in the coffin by arguing that trading (excluding tax-loss harvesting trades) makes things worse from a post-tax perspective as well. My write-up…

Is Your Alpha Big Enough to Cover its Taxes? (Jurassic Park edition)
I can think of around 20 ways to thoughtfully de-risk a concentrated public stock position. The “right” solution is in there somewhere. Learn more at Basis Northwest.
Tax Alpha InsiderBrent Sullivan

Jeffrey and Arnott also mention the oft-quoted “tax-deferral is an interest-free loan from the Treasury” line that succinctly captures the value of tax deferral.

They further say, quoting Garland (1987), that a step-up in basis is like free life insurance.

Most folks working in tax management are aware of the interest-free loan analogy, but I’m sure far fewer think about step-up in basis like free life insurance.

These analogies are side quests from the main point of their paper, but I thought it would be fun to unpack each.