Does Property Inherited Through a Trust Get a Step-Up? (w/Examples) + FAQs

This article reflects federal rules and key community-property state rules as of June 2026 and covers tax year 2025 and the 2026 filing season. Tax law changes — confirm current figures before you file.

Quick Answer

It depends on the trust. For 2025–2026, property inherited through a revocable trust gets a full step-up in basis at the grantor’s death, because the assets stay in the grantor’s taxable estate under IRC §1014. Most irrevocable trusts do not.

The single fact that decides everything is this: an asset gets a new “stepped-up” cost basis at death only if it is included in the decedent’s gross estate. A revocable living trust keeps assets in your estate, so they reset to fair market value when you die. A typical irrevocable trust pulls assets out of your estate, so they keep their old, low basis — and your heirs can owe large capital gains tax when they sell. The dollars at stake are real: with appreciated real estate or stock, the difference between a step-up and no step-up can be tens or hundreds of thousands of dollars in tax.

This matters more than ever because most families will never owe federal estate tax. The Tax Policy Center estimates that far fewer than 0.1% of estates owe any estate tax, and the One Big Beautiful Bill Act raised the exemption to $15 million per person starting in 2026. That means for almost everyone, the income tax step-up is the prize worth protecting — not avoiding an estate tax you were never going to owe.

Here is what you will learn:

🧬 What a step-up in basis is, and the one rule that controls whether trust property qualifies.
🔄 Why revocable trusts get the step-up but most irrevocable trusts do not.
🧮 Fully worked dollar examples so you can copy the math for your own situation.
🏡 How community-property states deliver a rare “double step-up” that wipes out capital gains.
⚠️ The mistakes that quietly cost heirs thousands — and exactly what to do next.

What “Step-Up in Basis” Actually Means

A cost basis is what you paid for an asset, plus certain costs, used to figure your taxable gain when you sell. If you bought stock for $50,000 and sell it for $200,000, your $150,000 gain is taxed. A step-up in basis resets that basis to the asset’s fair market value on the owner’s date of death.

The authority is Internal Revenue Code Section 1014. It says property “acquired from a decedent” takes a new basis equal to its value at death. The consequence is huge: all the appreciation that built up during the owner’s life is never taxed as income. If your heir sells right away at the date-of-death value, the gain is roughly zero.

The reason Congress allows this is to avoid taxing the same gain twice — once under the estate tax and again under the income tax. So the law ties the step-up to estate inclusion. The misconception to bury now: a step-up is not automatic just because property sat in “a trust.” The trust type decides it. What you should do about it is simple — before assuming your heirs get a clean slate, confirm whether the trust holding the asset keeps that asset in your taxable estate.

Step-Up vs. Step-Down

Basis adjusts in both directions. If an asset is worth less at death than the decedent paid, Section 1014 steps the basis down to the lower value. A stock bought at $100,000 that is worth $60,000 at death takes a $60,000 basis, and the lost value disappears for tax purposes.

The consequence is a planning trap: heirs can lose a deductible loss they would have kept if the owner sold before death. A common misconception is that death always helps; it does not when an asset has dropped. What to do: if an asset has fallen below its basis, talk to a CPA about whether selling before death preserves a usable capital loss instead of letting it vanish at the step-down.

The One Rule That Decides Everything: Estate Inclusion

The entire question turns on a single test. Does the property sit inside the decedent’s gross estate under the estate-tax rules? If yes, it gets a step-up. If no, it keeps its old basis. The trust label — “living,” “family,” “irrevocable” — matters only because it tells you whether the assets are inside or outside the estate.

This is why the answer is never “trusts get a step-up” or “trusts don’t.” It is “estate inclusion gets a step-up.” A revocable trust includes assets in your estate because you kept control and could undo it at any time. A classic irrevocable trust excludes them because you gave them away — you no longer own them at death, so there is nothing in your estate to revalue.

The consequence of getting this wrong is severe and silent. Families set up irrevocable trusts to dodge an estate tax most of them will never owe, and in doing so they hand their heirs a low-basis asset and a giant future capital gains bill. What to do about it: match the tool to the real goal. If your estate is well under the $15 million 2026 exemption, prioritizing the income tax step-up usually beats removing assets from an estate that owes no tax anyway.

Revocable Living Trusts: Yes, You Get the Step-Up

A revocable living trust is one you can change, amend, or cancel while you are alive. Because you keep that control, the IRS treats the assets as still yours. They are pulled into your gross estate under IRC §2038, and that estate inclusion triggers a full step-up at your death, as estate planning guidance confirms.

This is the most common trust for ordinary families, and it delivers the best of both worlds: assets avoid probate and still get the basis reset. The misconception here is that “putting the house in a trust” loses the step-up — for a revocable trust, that is false. The step-up is fully preserved.

What you should do: confirm your living trust is revocable (the trust document and your estate attorney can tell you in minutes), and make sure appreciated assets like the family home and taxable brokerage accounts are titled into it. The deadline that matters is while you are alive and competent — a trust cannot be funded after death.

Worked Example — Revocable Trust

Maria buys a home in 1995 for $150,000 and titles it in her revocable living trust. She dies in 2025 when the home is worth $700,000. Her son David inherits it through the trust.

Because the home was in Maria’s estate, its basis steps up from $150,000 to the $700,000 date-of-death value. If David sells for $710,000 in 2026, his taxable gain is only $10,000 — the appreciation since death. Without the step-up, his gain would have been $560,000. At the 15% federal long-term capital gains rate, the step-up saves David roughly $82,500 in federal tax alone.

Irrevocable Trusts: Usually No Step-Up

An irrevocable trust generally cannot be changed once created, and the grantor gives up control of the assets. Because the assets leave the grantor’s estate, the default answer is no step-up — the property keeps its original basis when the beneficiary receives it. This is the rule that surprises the most families.

The consequence is a deferred tax bomb. A child who inherits low-basis stock or land through an irrevocable trust can face capital gains on decades of appreciation the moment they sell. A common misconception — that any property “passed at death” is automatically stepped up — is wrong here, because the asset was given away before death, not transferred at death.

What to do about it: read the trust to see whether assets are included in the grantor’s estate, and ask the attorney who drafted it whether any estate-inclusion power was built in. Many modern irrevocable trusts are deliberately designed to keep a step-up, so the label alone does not settle it.

The Irrevocable Grantor Trust Trap (Rev. Rul. 2023-2)

A grantor trust is one where the grantor still pays income tax on the trust’s earnings, even though the assets are out of the estate. People long assumed these “intentionally defective grantor trusts” (IDGTs) still got a step-up. In 2023 the IRS shut that down.

In Revenue Ruling 2023-2, the IRS held that assets in an irrevocable grantor trust do not get a step-up at the grantor’s death if they are not included in the gross estate. Paying the income tax does not put the assets back in the estate. The consequence: heirs of these trusts keep the old basis and face the full capital gain. What to do — if you have an IDGT, see the workaround below before the grantor dies, because after death it is too late.

When an Irrevocable Trust Does Get a Step-Up

Not every irrevocable trust loses the step-up. If the trust is drafted so the assets stay in the grantor’s gross estate, Section 1014 still applies. The most common tools are a retained limited power of appointment or a transfer treated as an incomplete gift, both of which keep the assets in the taxable estate.

A second fix is the swap power. Many grantor trusts let the grantor swap high-basis assets for the trust’s low-basis assets before death, pulling the low-basis property back into the estate where it can be stepped up. The consequence of using these tools well is a step-up and asset protection. What to do: ask your estate attorney whether your trust holds a swap power or a power of appointment — these features must exist in the document and be exercised before death.

Which Situation Applies to You?

The right answer depends on which trust holds the property and whether the grantor has died. Use this to find your path:

You have a revocable living trust and the grantor is alive: Assets are in the estate; a step-up is on track. Keep appreciated assets titled in the trust.
You inherited through a revocable trust: You almost certainly get a full step-up to the date-of-death value. Gather the date-of-death appraisal.
You have an irrevocable trust and the grantor is alive: Check for a swap power or power of appointment now — there may still be time to protect the step-up.
You inherited through an irrevocable trust: Confirm whether the assets were in the grantor’s gross estate. If not, expect the original basis to carry over.
You are a married couple in a community-property state: A “double step-up” may reset 100% of the asset at the first death — see below.

The Community-Property “Double Step-Up”

Married couples in community-property states get a powerful bonus. Under IRC §1014(b)(6), when one spouse dies, both halves of a community-property asset step up to fair market value — not just the deceased spouse’s half. This is the double step-up, and it can erase capital gains entirely for the surviving spouse.

Community-property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A few states (such as Alaska, Tennessee, and Florida) let couples opt into community-property treatment through a special trust. The consequence is dramatic: a surviving spouse can sell the family home shortly after the first death and owe almost no capital gains tax.

In common-law states (most of the country), only the deceased spouse’s half gets a step-up; the survivor’s half keeps its old basis. The misconception is that all married couples get the double step-up — they do not. What to do: if you live in a community-property state, confirm the asset is properly characterized as community property, and if you live in a common-law state, ask your attorney whether a community property trust in an opt-in state fits your situation.

Worked Example — Community vs. Common-Law

Barney and Betty buy a home for $200,000 that is worth $600,000 when Barney dies in 2025. They hold it as community property in California.

Under IRC §1014(b)(6), the entire $600,000 value resets. Betty’s basis becomes $600,000, so a sale at $600,000 produces zero capital gain. In a common-law state, only Barney’s half steps up: Betty’s basis would be $100,000 (her old half) plus $300,000 (his stepped-up half) = $400,000, leaving a $200,000 taxable gain on a $600,000 sale. The community-property rule saves Betty tax on $200,000 of gain — about $30,000 federally at 15%.

Federal vs. State: Two Different Questions

Two separate taxes are in play, and readers confuse them constantly. The first is the federal estate tax, which almost no one owes — the exemption is $13.99 million per person for 2025 and rises to $15 million for 2026 under OBBBA. The second is the income tax on capital gains, which heirs pay when they sell — and which the step-up directly reduces.

Federal step-up rule	State treatment
IRC §1014 gives a step-up to estate-included assets nationwide.	Most states follow the federal basis, so the step-up carries over for state income tax too.
Double step-up applies under §1014(b)(6) in community-property states.	Only community-property and opt-in states deliver the double step-up.
No federal estate tax below the $15M 2026 exemption.	A dozen-plus states levy their own estate or inheritance tax at far lower thresholds.

The consequence of mixing these up is bad planning: people remove assets from an estate to dodge a federal tax they would never owe, sacrificing the income tax step-up their heirs truly need. What to do: separate the two questions. First ask, “Will my estate owe estate tax?” For most, the answer is no. Then ask, “Will my heirs owe capital gains tax?” — and protect the step-up that answers it.

Scenario Tables

These three patterns cover the situations most readers face.

Revocable living trust at death

What happens with the property	Tax result for the heir
Home stays in the grantor’s estate and resets to date-of-death value under §1014.	Heir sells near that value and owes little or no capital gains tax.
Brokerage account in the trust steps up to date-of-death price per share.	Decades of stock appreciation are wiped out for income tax.

Irrevocable trust, assets removed from the estate

What happens with the property	Tax result for the heir
Asset was a completed gift, so no step-up applies per Rev. Rul. 2023-2.	Heir inherits the grantor’s original low basis and owes gains on all appreciation.
Trust holds a swap power exercised before death.	Low-basis assets are pulled back into the estate and do step up.

Community-property home at first spouse’s death

What happens with the property	Tax result for the surviving spouse
100% of the home resets under §1014(b)(6).	Spouse can sell soon after death with near-zero capital gain.
Asset wrongly held as joint tenancy, not community property.	Only half steps up, leaving a large taxable gain.

Named Examples

David and the family home. David’s mother held her house in a revocable living trust. She bought it for $150,000; it was worth $700,000 at her 2025 death. Because the home was in her estate, David’s basis stepped up to $700,000, and his gain on a quick sale was almost nothing — a difference of roughly $82,500 in federal tax versus carryover basis.

Susan and the irrevocable gift trust. Susan’s father moved appreciated stock into an irrevocable grantor trust in 2018 to “protect” it. He paid the trust’s income tax, so the family assumed a step-up. After Rev. Rul. 2023-2, Susan learned the stock kept its $40,000 basis. Selling at $300,000 left a $260,000 gain — about $39,000 in avoidable federal tax.

Betty in California. Betty and her late husband owned their home as community property. Under IRC §1014(b)(6), the entire home stepped up at his death, so Betty sold with zero capital gain — saving tax a common-law state would have charged on her half.

Mistakes to Avoid

Assuming all trusts get a step-up. Only estate-included assets qualify, so an irrevocable trust can leave heirs with the full original gain.
Using an irrevocable trust to dodge an estate tax you won’t owe. With a $15 million 2026 exemption, you may sacrifice the step-up for no benefit.
Holding community property as joint tenancy. This forfeits the double step-up and steps up only half the asset.
Forgetting to fund the revocable trust. An unfunded trust holds nothing, and assets left outside may face probate even if the step-up still applies.
Ignoring the swap power before death. A grantor trust’s swap power must be exercised while the grantor is alive to pull low-basis assets back for a step-up.
Missing the step-down. Selling a depreciated asset after death can erase a usable loss instead of preserving it.
No date-of-death valuation. Without a proper appraisal, heirs can’t prove the new basis and may overpay capital gains tax.
Confusing federal and state estate taxes. Several states tax estates far below the federal exemption, and skipping that check leads to surprise bills.

Do’s and Don’ts

Do confirm whether your trust is revocable or irrevocable — because that single fact controls the step-up.
Do get a date-of-death appraisal for real estate and a closing-price record for securities — because the IRS needs proof of the new basis.
Do match the tool to the goal — because removing assets from an estate that owes no tax usually costs more than it saves.
Do ask about swap powers and powers of appointment — because they can rescue a step-up inside an irrevocable trust.
Do separate estate tax from capital gains tax — because the planning is different for each.
Don’t assume “in a trust” means “stepped up” — because only estate inclusion triggers the reset.
Don’t title community property as joint tenancy — because you lose the double step-up.
Don’t wait until after death to fix an irrevocable trust — because the step-up tools must be used while the grantor is alive.
Don’t ignore depreciated assets — because a step-down can quietly waste a deductible loss.
Don’t skip professional help on irrevocable trusts — because the Rev. Rul. 2023-2 rules are unforgiving.

Pros and Cons of Using a Trust for the Step-Up

Pro — Probate avoidance: A revocable trust skips probate while keeping the full step-up, saving time and court costs.
Pro — Full step-up preserved: Revocable trust assets reset to date-of-death value, erasing lifetime appreciation for heirs.
Pro — Double step-up access: A community property trust can reset 100% of a marital asset at the first death.
Pro — Asset protection with planning: A well-drafted irrevocable trust can shield assets and keep a step-up using estate-inclusion powers.
Pro — Control and privacy: Trusts let you direct distributions and keep terms out of public probate records.
Con — Irrevocable trusts can lose the step-up: Removing assets from the estate often hands heirs a large capital gains bill.
Con — Complexity and cost: Trusts cost more to draft and administer than a simple will, often $1,500–$5,000+ to set up.
Con — Rigidity: An irrevocable trust is hard to change if tax law or family needs shift.
Con — Easy to misexecute: Wrong titling or an unfunded trust can defeat the very benefit you wanted.
Con — Ongoing tax filing: Some trusts must file their own returns, adding annual cost and paperwork.

Deadlines, Costs, and Timing

The step-up is locked in at the date of death — there is no form to “claim” it, but you must prove the new basis. Get a qualified appraisal for real estate and record the date-of-death market value for securities; keep these permanently. An estate may also elect the alternate valuation date (six months after death) on Form 706 if it lowers both estate value and tax, but that election is generally available only for estates that must file a return.

A revocable living trust typically costs $1,500–$5,000 to set up with an attorney, while irrevocable trust planning runs higher. The capital gains return itself is reported when the heir sells, on Form 8949 and Schedule D. When the situation involves an irrevocable trust, a possible estate-tax filing, or community-property characterization, the cost of a CPA or estate attorney is small next to the tax at risk.

What to Do Next

Identify the trust type. Read the first page of the trust or ask the drafting attorney whether it is revocable or irrevocable — this decides the step-up.
Confirm estate inclusion. For irrevocable trusts, ask whether assets are in the grantor’s gross estate and whether a swap power or power of appointment exists.
Gather date-of-death values. Order a real estate appraisal and pull closing prices for securities as of the date of death.
Check community-property status if married, and verify the asset is titled correctly to capture the double step-up.
Report the sale correctly using Form 8949 and Schedule D when an heir sells, applying the stepped-up basis.
Call a professional — a CPA or estate attorney — before the grantor dies if an irrevocable trust is involved, because the fixes expire at death.

This article is educational and is not a substitute for advice from a licensed CPA, tax attorney, or estate attorney for your specific situation. Irrevocable trusts, estate-tax filings, and community-property questions are complex enough that professional help is well worth the cost.

FAQs

Does property in a revocable living trust get a step-up in basis?

Yes. A revocable trust keeps assets in the grantor’s estate, so they step up to fair market value at death under IRC §1014. This applies for 2025–2026 deaths.

Does property in an irrevocable trust get a step-up?

Usually no. Assets given to an irrevocable trust typically leave the grantor’s estate, so they keep their original basis. They step up only if drafted to stay in the gross estate.

Did Rev. Rul. 2023-2 change the law?

No. Rev. Rul. 2023-2 clarified that irrevocable grantor trust assets get no step-up unless included in the gross estate. Paying the trust’s income tax alone does not create a step-up.

What is the federal estate tax exemption for 2026?

$15 million per person. The OBBBA permanently raised it from $13.99 million in 2025, or $30 million for a married couple, indexed for inflation after 2026.

What is a “double step-up”?

A 100% basis reset. In community-property states, IRC §1014(b)(6) steps up both spouses’ halves of a community asset at the first death, not just the deceased spouse’s half.

Which states allow the double step-up?

Community-property states. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin qualify, plus opt-in states like Alaska, Tennessee, and Florida through a special community property trust.

Can an irrevocable trust be fixed to keep the step-up?

Yes, sometimes. A swap power or power of appointment can pull low-basis assets back into the estate, but it must be done while the grantor is alive.

Do I have to file a form to claim the step-up?

No special form. The step-up happens automatically under §1014. You report the sale later on Form 8949 and Schedule D using the new basis — so keep proof of value.

Can basis step down at death?

Yes. If an asset is worth less than its basis at death, §1014 lowers the basis to the date-of-death value, which can erase a loss the heir might otherwise have used.

Do states follow the federal step-up?

Most do. Nearly all states accept the federal basis for state income tax, so the step-up carries over. A separate group of states impose their own estate or inheritance tax at lower thresholds.

Does the surviving spouse get a step-up in a common-law state?

Only half. In common-law states, just the deceased spouse’s share of jointly owned property steps up; the survivor’s half keeps its old basis, unlike the community-property double step-up.

Is a trust step-up better than gifting during life?

Often yes. Lifetime gifts carry over the giver’s low basis, while inheriting at death through an estate-included trust resets the basis — usually saving the heir far more in capital gains tax.

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