Yes. Assets held in a revocable living trust do get a step-up in basis when the grantor dies. Internal Revenue Code Section 1014 specifically lists property in a trust the grantor could revoke as one of the categories treated as “acquired from a decedent,” which puts these assets on the same footing as property passed through a will.1Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent The basis of each qualifying asset resets to its fair market value on the date of death, which can erase decades of built-in capital gains for the beneficiaries.
Why Revocable Trust Assets Qualify
The reason comes down to how the tax code treats control. Because the grantor could pull assets out, change the terms, or dissolve the trust entirely at any time, the IRS treats those assets as still belonging to the grantor at death. Section 2038 sweeps any transfer where the grantor kept the power to alter, amend, revoke, or terminate into the gross estate.2Office of the Law Revision Counsel. 26 USC 2038 – Revocable Transfers Inclusion in the gross estate is what triggers the basis reset.
This is where revocable trusts part company with most irrevocable trusts. When a grantor gives up the power to change an irrevocable trust and completes the gift, those assets generally leave the estate and do not get a step-up. Revenue Ruling 2023-2 confirmed the point: assets in an irrevocable grantor trust that are not includible in the decedent’s gross estate keep their original basis.3Internal Revenue Service. Internal Revenue Bulletin 2023-16 The revocable trust avoids that problem precisely because the grantor never fully let go.
What the Step-Up Means for Beneficiaries
Cost basis is what the original owner paid, including commissions and fees. Capital gains tax applies to the difference between the sale price and that basis, so a higher basis means a smaller taxable gain.
Take a stock the grantor bought for $50,000 that is worth $500,000 at death. The beneficiary’s basis becomes $500,000. Sell it for $510,000, and the taxable gain is $10,000, not the $450,000 that accumulated during the grantor’s lifetime.1Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
Two other features are worth knowing. Inherited property is automatically treated as held long-term, no matter how quickly the beneficiary sells, so any gain qualifies for the lower long-term capital gains rate.4Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property And the adjustment cuts both ways. If an asset has lost value, its basis steps down to fair market value at death, and the unrealized loss is gone for good. For assets that are deeply underwater, selling before death to claim the loss is often a better move than holding them for the basis adjustment.
Assets in the Trust That Don’t Get a Step-Up
Holding an asset in a revocable trust does not guarantee it receives the basis adjustment. Section 1014(c) carves out any property that represents a right to receive income the decedent earned but had not yet been taxed on. This is income in respect of a decedent, or IRD.5Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent – Section: (c)
The most common IRD assets are traditional IRAs and 401(k)s. The grantor never paid income tax on the money inside those accounts, and that tax obligation passes to the beneficiary. Distributions are taxed as ordinary income, and no step-up softens the impact. Unpaid wages, accrued bonuses, deferred compensation, and annuities with accumulated gains fall in the same bucket.
This trips up families who name the revocable trust as the beneficiary of a retirement account and assume everything in the trust gets identical treatment. It does not. The retirement account keeps its ordinary-income character regardless of the trust wrapper.
What the Successor Trustee Has to Do
The step-up is a legal result, but the paperwork proving it is on the successor trustee. When the grantor dies, the revocable trust becomes irrevocable by its own terms, and one of the trustee’s first jobs is establishing the fair market value of every trust asset as of the date of death. Without documentation, the stepped-up basis is a theory that will not hold up if the IRS challenges the beneficiary’s return years later.
How to value depends on the asset:
- Publicly traded stocks and bonds are valued at the closing prices on the date of death. Most brokerages will produce a date-of-death valuation report on request with a death certificate.
- Real estate needs a formal appraisal from a licensed appraiser as of the date of death.
- Privately held business interests require a qualified business appraiser, and the cost reflects the complexity of the business.
- Valuable art, jewelry, antiques, and other collectibles need appraisers with credentials in the specific field.
Keep every appraisal, statement, and valuation document permanently. When a beneficiary sells an inherited asset years later, that paperwork is the proof of basis on the tax return. Valuation also matters in the other direction: the IRS imposes accuracy-related penalties when values reported on an estate tax return are significantly understated, so using qualified independent appraisers protects the estate on both sides.6Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
The Alternative Valuation Date
The default is the date of death, but the executor can elect an alternative valuation date six months later under Section 2032. The election is only available if it reduces both the gross estate value and the total estate tax owed. Once made on the estate tax return, it is irrevocable, and any asset sold or distributed within the six months is valued as of the date it left the estate.7Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation
The trade-off matters for basis. Electing the lower six-month value to shrink the estate tax also shrinks the stepped-up basis the beneficiaries inherit. The election works when estate tax savings outweigh the future capital gains cost. For estates that owe little or no estate tax, it usually hurts more than it helps.
The Community Property Double Step-Up
Married couples in community property states get a more generous version of the step-up. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, most assets acquired during the marriage belong equally to both spouses.
Under Section 1014(b)(6), when one spouse dies, the surviving spouse’s half of community property also receives a basis adjustment, as long as at least half of the community interest was includible in the decedent’s gross estate.8Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent – Section: (b)(6) Both halves reset to fair market value at death.
The difference is significant. A couple buys a home for $200,000, and at the first spouse’s death it is worth $1 million. In a community property state, the full basis resets to $1 million, and the survivor could sell with essentially no capital gain. In a common law state, only the deceased spouse’s half steps up, leaving a blended basis of $600,000 and a $400,000 potential gain on an immediate sale.
Holding community property in a revocable trust does not disturb this treatment as long as the assets keep their community property character under state law. The most common way to lose the benefit is inadvertently converting community property to separate property through a written agreement during estate planning.
Estate Tax Reporting and What Changes in 2026
When an estate is large enough to require Form 706 (the federal estate tax return), the executor or successor trustee must also file Form 8971 and give each beneficiary a Schedule A. This form reports the final value of inherited assets so the IRS can confirm that beneficiaries later use the correct stepped-up basis on their own returns.9Internal Revenue Service. Instructions for Form 8971 and Schedule A If the estate falls below the basic exclusion amount and no Form 706 is required, no Form 8971 is due either. Estates filing Form 706 only to elect portability of the deceased spouse’s unused exemption are also exempt.
The exclusion amount matters more starting in 2026. The Tax Cuts and Jobs Act roughly doubled the exemption beginning in 2018, but that increase expires on December 31, 2025. For individuals dying in 2026, the exemption reverts to its pre-2018 level of $5 million adjusted for inflation, estimated at approximately $7 million per person.10Internal Revenue Service. Estate and Gift Tax FAQs For married couples, the combined exemption drops from over $27 million to roughly $14 million.
The step-up itself does not change. Revocable trust assets still receive the basis adjustment regardless of whether the estate owes any tax. But many more estates will cross the Form 706 filing threshold, and the trustee’s valuation and reporting work becomes more consequential as a result.