Yes, revocable trusts do get a step-up in basis at the grantor’s death. Internal Revenue Code Section 1014 lists revocable trust property as one of the categories of assets considered “acquired from a decedent,” which means the cost basis resets to fair market value on the date of death, the same treatment that applies to property passed through a will.1Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent The reason is simple: because the grantor could revoke the trust at any time, the IRS treats those assets as still belonging to the grantor for estate tax purposes under Section 2038, and inclusion in the gross estate is what triggers the basis reset.2Office of the Law Revision Counsel. 26 USC 2038 – Revocable Transfers
That answer comes with real exceptions and some work for the successor trustee, both of which matter if you want the tax benefit to actually show up on a future return.
What the Step-Up Does for the Beneficiary
Cost basis is what the original owner paid, including commissions and fees. Capital gains tax is calculated on the difference between the sale price and that basis. A higher basis means a smaller taxable gain.
When the grantor dies, basis on most trust property resets to the fair market value on the date of death. If a parent bought stock for $50,000 and it was worth $500,000 at death, the beneficiary’s basis is $500,000. Sell for $510,000 and the taxable gain is $10,000, not the $450,000 that built up during the parent’s lifetime.
Two details are worth knowing. First, the adjustment runs in both directions. An asset that has lost value steps down to the lower date-of-death value, and the unrealized loss disappears for the family. When a grantor holds significantly depreciated assets, selling before death to claim the loss is often better than leaving them in the trust. Second, inherited property is automatically treated as long-term, no matter how quickly the beneficiary sells. Even a sale the day after inheritance qualifies for the lower long-term capital gains rate.3Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property
Assets in the Trust That Do Not Get Stepped Up
Holding something inside a revocable trust is not a guarantee it receives the basis adjustment. The big carve-out is income in respect of a decedent, or IRD. Section 1014(c) excludes any property that represents income the decedent earned but had not yet been taxed on.4Office 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 original owner never paid income tax on the money inside those accounts, so the tax obligation transfers to the person who inherits them. Beneficiaries pay ordinary income tax on distributions, and no step-up softens that. Other IRD items include unpaid wages, accrued but unpaid bonuses, deferred compensation, and annuities with accumulated gains.
This trips people up because many name their revocable trust as the beneficiary of a retirement account, assuming every asset flowing through the trust gets the same favorable treatment. It doesn’t. Those retirement distributions are taxed as ordinary income to the beneficiaries whether or not the trust is the named recipient.
Why Irrevocable Trusts Are Different
If you are researching this because of an irrevocable trust rather than a revocable one, the answer usually flips. When a grantor transfers assets to an irrevocable trust and gives up the power to change it, those assets generally leave the grantor’s estate, and no estate inclusion means no basis reset.
Revenue Ruling 2023-2 confirmed this directly for a common planning setup: assets in an irrevocable grantor trust that are not includible in the decedent’s gross estate do not get a step-up at death. The basis stays exactly where it was.5Internal Revenue Service. Internal Revenue Bulletin 2023-16 Some irrevocable trusts are structured so the assets are pulled back into the grantor’s estate, and those can still qualify, but the default assumption for an irrevocable trust should be the opposite of the revocable rule.
What the Successor Trustee Has to Do
At the grantor’s death, the revocable trust becomes irrevocable by its terms, and the successor trustee takes over. One of the first jobs is pinning down the fair market value of every trust asset as of the date of death. Without documentation, the step-up is only a theory, and it will not hold up if the IRS questions a beneficiary’s basis years later.
What that valuation looks like depends on the asset:
- Publicly traded stocks and bonds: closing prices on the date of death from brokerage statements. Most brokerages will produce a date-of-death valuation report on request if you provide the death certificate.
- Real estate: a formal appraisal by a licensed appraiser as of the date of death. Typical fees for a standard single-family home range from roughly $300 to $600, with complex or high-value properties costing more.
- Privately held business interests: a qualified business appraiser, often several thousand dollars to $10,000 or more depending on complexity.
- Valuable art, jewelry, antiques, and collectibles: specialized appraisers with credentials in the relevant field.
Keep every appraisal, brokerage statement, and valuation report permanently. When a beneficiary sells an inherited asset years later, this paperwork is the evidence of the stepped-up basis on the tax return. Lose it, and the IRS can challenge the claimed basis and assess tax on a much larger gain.
Community Property and the Double Step-Up
Married couples in community property states get a more valuable version of the rule. In those states, most assets acquired during the marriage are treated as owned equally by both spouses. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
When one spouse dies, the ordinary rule would reset only the deceased spouse’s half. Section 1014(b)(6) goes further: the surviving spouse’s half of community property also gets a basis adjustment, as long as at least half of the community interest was includible in the decedent’s gross estate.6Office 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 math is dramatic. A couple buys a home for $200,000. At the first spouse’s death, it’s worth $1 million. In a community property state, the entire basis resets to $1 million, and the survivor could sell with essentially zero taxable appreciation. In a common law state, only the deceased spouse’s half steps up; the survivor’s half keeps its original $100,000 basis, producing a blended basis of $600,000 and a potential $400,000 taxable gain on an immediate sale.
A revocable trust holding community property does not change this treatment. The community property character carries through the trust, and the double step-up still applies, provided the assets kept their community property status 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.
When the Trust Triggers IRS Reporting
The step-up applies regardless of whether the estate owes any federal estate tax. Reporting is a separate question. If the 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 showing the final value of inherited assets. The point is to let the IRS verify that beneficiaries use the correct stepped-up basis when they sell.7Internal Revenue Service. Instructions for Form 8971 and Schedule A
Estates below the basic exclusion amount do not file Form 706 and do not file Form 8971. Estates that file Form 706 only to elect portability of a deceased spouse’s unused exemption are also excused from Form 8971.
That threshold is moving. The Tax Cuts and Jobs Act roughly doubled the exemption starting in 2018, and 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.8Internal Revenue Service. Estate and Gift Tax FAQs Many more estates will cross the filing threshold, and more successor trustees will deal with Form 706 and Form 8971. The step-up itself is unaffected by the exemption change: trust assets still get the basis reset whether or not any estate tax is owed.