Do Irrevocable Trusts Get a Step-Up in Basis at Death?

Assets in an irrevocable trust generally do not get a step-up in basis when the grantor dies. The reset to fair market value under Section 1014 of the Internal Revenue Code applies only to property “acquired from a decedent,” and a completed gift to an irrevocable trust usually leaves the grantor’s estate long before death. The IRS made that position explicit in Revenue Ruling 2023-2. There are exceptions, but they all depend on whether the trust was structured so the assets are still counted in the grantor’s gross estate.¹

Why the Default Answer Is No

A step-up in basis resets the cost basis of inherited property to its fair market value on the date of death. If a parent bought stock for $50,000 and it was worth $500,000 when they died, an heir who inherits it takes a $500,000 basis and can sell immediately with little or no capital gains tax. Section 1014 grants this adjustment, but only for property that qualifies as “acquired from a decedent.”²

A standard irrevocable trust does not clear that bar. When you transfer assets to the trust and give up control, the IRS treats the transfer as a completed gift. The assets leave your taxable estate, which is often the goal, because it removes them from estate tax exposure. But the same feature that produces the estate tax benefit disqualifies the assets from the step-up. You cannot have both.

Revenue Ruling 2023-2 addressed this directly. The IRS analyzed an irrevocable trust where the grantor had made a completed gift and retained a power that made the grantor responsible for the trust’s income taxes, but not a power that would pull the assets back into the estate. The ruling concluded that the basis immediately after death was the same as the basis immediately before death. No step-up.

What the Beneficiaries Get Instead: Carryover Basis

When trust assets do not qualify for a step-up, they keep a carryover basis under Section 1015. The trust’s basis equals the grantor’s basis at the time of the gift, adjusted for improvements and depreciation.³

The cost of that difference can be large. Take stock the grantor bought for $50,000 that grew to $500,000 by death. If it was held personally or in a revocable trust, the basis resets to $500,000 and an immediate sale produces no taxable gain. If it was in an irrevocable trust and stayed out of the estate, the basis remains $50,000, and a sale produces $450,000 of capital gain.

Adjustment When Gift Tax Was Paid

If the grantor paid federal gift tax on the original transfer, part of that tax gets added to the basis. The increase is the share of gift tax attributable to the asset’s net appreciation at the time of the gift, not the full gift tax paid. Divide net appreciation (fair market value at the time of the gift minus the donor’s basis) by the total value of the gift, then multiply by the gift tax paid. If the donor’s basis was $70,000, the fair market value at gifting was $100,000, and $33,300 in gift tax was paid, the basis increase is ($30,000 ÷ $100,000) × $33,300 = $9,990. The beneficiary’s basis becomes $79,990 rather than $70,000.⁴

Loss Property Is Treated Differently

If the fair market value of the property was lower than the donor’s basis at the time of the gift, Section 1015 uses the lower fair market value for calculating a loss on a later sale. This prevents shifting a built-in loss to a beneficiary in a higher bracket.³

When an Irrevocable Trust Does Get a Step-Up

The exceptions all work the same way: if the trust is drafted so the assets are pulled back into someone’s gross estate at death, those assets qualify for a basis adjustment under Section 1014. Several code provisions can trigger that inclusion.

Retained Life Estate or Income Rights

Section 2036 requires inclusion when the grantor transferred property but kept the right to use it, occupy it, or receive income from it for life. A common example is transferring a home to an irrevocable trust while continuing to live there. Because the grantor retained possession, the home is counted in the estate, and it qualifies for a step-up.⁵

Retained Power to Alter the Trust

Section 2038 pulls assets back into the estate if the grantor held the power to change who benefits from the trust or how and when they benefit, even if the power could only be exercised jointly with another person. Assets included on this basis also qualify for a step-up.⁶

General Power of Appointment

A general power of appointment under Section 2041 is one of the tools most often used to trigger estate inclusion on purpose. The power lets someone, often a beneficiary, direct trust assets to themselves, their estate, or their creditors. Because the holder could take the assets, the IRS treats them as part of that person’s estate at death.⁷

Some estate planners add a general power of appointment to an irrevocable trust specifically to secure a step-up. The trade-off is that the assets become subject to estate tax. When the estate is below the federal exemption, no estate tax is actually owed, and the beneficiaries still get the basis reset. The drafting has to be careful: the power must be broad enough to cause inclusion but narrow enough to avoid unintended results.

The Grantor Trust Trap

An intentionally defective grantor trust (IDGT) creates a deliberate mismatch. The grantor pays income tax on the trust’s earnings as if still the owner, but the assets are excluded from the grantor’s estate. That lets the trust grow without eroding the beneficiaries’ inheritance to income tax, while the assets sit outside the estate for estate tax purposes.

Revenue Ruling 2023-2 was aimed at exactly this structure. The IRS held that being treated as the income tax owner does not, by itself, make the assets “acquired from a decedent” under Section 1014. Because the transfer was a completed gift and the assets are not in the gross estate, they keep their carryover basis.¹ Families using an IDGT need to weigh the estate tax savings against the capital gains bill their beneficiaries will face on eventual sale.

How Revocable Trusts Compare

A revocable trust always gets a full step-up at the grantor’s death. Because the grantor could revoke or change the trust at any time, its assets remain part of the gross estate, and Section 1014(b)(2) lists property in a revocable trust as qualifying.¹ The trade-off is the reverse of the irrevocable trust: full step-up, no estate tax reduction. The right choice turns on the size of the estate, the amount of built-in appreciation, and the applicable tax rates.

One boundary worth flagging for married couples in community property states: Section 1014(b)(6) provides a double step-up on both halves of community property when one spouse dies, but only if at least half of the community interest was included in the decedent’s gross estate. Community property transferred to an irrevocable trust and removed from both spouses’ estates does not get that treatment.

Does Giving Up the Step-Up Still Make Sense?

For 2026, the federal estate tax exemption is $15 million per individual under legislation that permanently raised the threshold. Married couples can shelter up to $30 million by combining both spouses’ exemptions through portability.⁸ The top federal estate tax rate remains 40% on amounts above the exemption.⁹

That threshold reshapes the analysis. Estates well below $15 million will owe no federal estate tax whether the assets are in an irrevocable trust or not, so removing assets from the estate produces no estate tax benefit while still costing the step-up. For estates that do exceed the exemption, the choice between paying 40% estate tax and preserving a basis reset that could save 23.8% in capital gains tax has to be run asset by asset, weighing each one’s built-in appreciation. Some states impose their own estate taxes with lower exemptions, which can shift the answer.

1
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
2
eCFR. 26 CFR 1.1014-1 – Basis of Property Acquired From a Decedent
3
Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
4
eCFR. 26 CFR 1.1015-5 – Increased Basis for Gift Tax Paid
5
Office of the Law Revision Counsel. 26 USC 2036 – Transfers With Retained Life Estate
6
Office of the Law Revision Counsel. 26 USC 2038 – Revocable Transfers
7
Office of the Law Revision Counsel. 26 USC 2041 – Powers of Appointment
8
Internal Revenue Service. What’s New – Estate and Gift Tax
9
Office of the Law Revision Counsel. 26 U.S. Code 2001 – Imposition and Rate of Tax