Does a Disclaimer Trust Get a Step-Up in Basis?

Yes, a disclaimer trust does get a step-up in basis on the assets that flow into it. Because a qualified disclaimer is treated as though the disclaiming spouse never received the property, the assets are considered to pass directly from the decedent to the trust, and that direct-from-decedent treatment triggers the same basis reset under Section 1014 that applies to any other inherited property.¹ When the trustee later sells, capital gains are measured from the fair market value at the date of death, not from what the decedent originally paid.

The dollar impact can be enormous. If a decedent bought stock for $10,000 that was worth $100,000 on the date of death, the trust’s basis becomes $100,000. A later sale at $105,000 produces a $5,000 gain instead of a $95,000 gain. On a long-held, heavily appreciated asset, this single rule can wipe out six figures of capital gains tax.

Why the Step-Up Reaches Assets That Pass Through a Disclaimer

The mechanism is written into the disclaimer rules themselves. When a beneficiary makes a qualified disclaimer, federal tax law treats the disclaimed property “as if it had never been transferred to the person making the qualified disclaimer,” and the property “is considered as passing directly from the transferor of the property to the person entitled to receive the property as a result of the disclaimer.”²

Applied to a disclaimer trust, the disclaiming spouse is treated as if they were never in the chain of ownership. The assets are deemed acquired directly from the decedent, which places them squarely within Section 1014’s rule granting basis equal to fair market value at the date of death.

This is what separates a disclaimer from a gift. If the surviving spouse accepts the inheritance and then transfers the assets into a trust, that is a gift, and gifts take a carryover basis. The recipient inherits the donor’s original cost, and all the appreciation built up during the decedent’s lifetime remains taxable on a future sale. A qualified disclaimer avoids that outcome by erasing the spouse from the transfer chain before any acceptance occurs.

The step-up runs in both directions. If the property has lost value, basis steps down to the lower fair market value at death. And if the executor elects the alternate valuation date under Section 2032, valuing the estate six months after death, the trust’s basis reflects that alternate date instead.³

The Catch: No Second Step-Up When the Surviving Spouse Dies

Here is the part that surprises people. Assets in a disclaimer trust receive a step-up at the first spouse’s death and no step-up when the surviving spouse dies. Keeping those assets out of the surviving spouse’s taxable estate is the whole point of the structure, but Section 1014 grants a step-up only for property included in a decedent’s gross estate or acquired from that decedent.¹ Trust assets that the surviving spouse does not own and that are not pulled into the surviving spouse’s estate do not qualify.

Consider the numbers. If the first spouse dies and $500,000 of stock enters the disclaimer trust with a $500,000 stepped-up basis, and fifteen years later that stock is worth $1.2 million when the surviving spouse dies, the trust’s basis is still $500,000. Beneficiaries inherit a built-in $700,000 capital gain. Had the stock instead passed outright and been included in the surviving spouse’s estate, it would have received a second step-up to $1.2 million, and that gain would disappear.

Whether the disclaimer trust still makes sense despite this depends on the size of the estate, the expected appreciation, and the applicable estate tax rate. For a large estate that would otherwise owe federal estate tax, the tax saved by keeping assets and their future growth out of the surviving spouse’s estate can far exceed the capital gains tax the beneficiaries will eventually pay. For estates well under the exclusion, the lost second step-up may cost more than the structure saves. For 2026, the basic exclusion amount is $15 million per person, or $30 million for a married couple.⁴ This is the calculation the surviving spouse should make inside the nine-month disclaimer window, ideally with a tax advisor running the numbers on the specific assets.

A disclaimer trust can still be worth using at these exclusion levels. Portability of a deceased spouse’s unused exclusion captures only the exemption amount and does not freeze the value of the deceased spouse’s assets. If everything passes outright, all future appreciation lands in the surviving spouse’s estate. A disclaimer trust locks disclaimed assets and their growth out of that estate, which can matter more than the lost second step-up for families whose wealth is expected to keep appreciating. Blended-family situations add another reason: the trust ensures the deceased spouse’s intended beneficiaries ultimately receive the assets.

What the Disclaimer Must Look Like to Preserve the Step-Up

The step-up only holds if the disclaimer qualifies under Section 2518. A disclaimer that fails any requirement is not a disclaimer at all for tax purposes. It becomes a gift from the person who tried to disclaim, with gift tax consequences and the loss of direct-from-decedent treatment, which puts the stepped-up basis at risk. The requirements are strict and mechanical:

The refusal must be in writing, irrevocable, and unqualified. Oral refusals and informal agreements do not count.⁵
The written disclaimer must be received by the transferor, their legal representative, or the holder of legal title.⁵
It must be received within nine months of the transfer creating the interest, or the day the disclaiming person turns 21, whichever is later. There is no extension, and courts enforce the deadline rigidly.⁵
The disclaiming person must not have accepted any benefit from the property. Collecting rent, cashing a dividend check, living in the property, or depositing interest from an inherited account can each count as acceptance that permanently disqualifies the disclaimer.
The disclaimed property must pass without any direction from the disclaiming person. The property must move on its own to the decedent’s spouse or to someone other than the person disclaiming.⁵

Partial disclaimers are allowed. A beneficiary can refuse a specific undivided fractional share or a severable interest and accept the rest.⁶ That flexibility is what lets the surviving spouse calibrate the disclaimer to the actual tax picture at the time of the first death.

Getting the Basis on the Record

Executors of estates that file a federal estate tax return must report the basis of inherited property to both the IRS and each beneficiary on Form 8971 and its Schedule A.⁷ Schedule A lists each asset, its estate tax value as reported on Form 706, and the beneficiary who received it. Assets passing into a disclaimer trust are reported the same way as any other inherited asset. If the executor elects the alternate valuation date, the values on Form 8971 reflect that date instead of the date of death.

The trustee should keep Schedule A as the authoritative record of the trust’s basis in each asset. When the trustee eventually sells, gain or loss is measured from those values. Nailing this down at the start prevents disputes and audit exposure years later, when memories have faded and the assets may have appreciated substantially.

1
Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
2
eCFR. 26 CFR 25.2518-1 – Qualified Disclaimers of Property; In General
3
Office of the Law Revision Counsel. 26 U.S. Code 2032 – Alternate Valuation
4
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
5
Office of the Law Revision Counsel. 26 U.S. Code 2518 – Disclaimers
6
eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer
7
Internal Revenue Service. About Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent