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

Yes, a disclaimer trust gets a step-up in basis. When a surviving spouse makes a qualified disclaimer, federal tax law treats the disclaimed property as if it passed directly from the decedent to the trust, which puts those assets squarely within the Section 1014 rule that resets basis to fair market value on the date of death. A trustee who later sells the assets calculates capital gains from that date-of-death value, not from whatever the decedent originally paid.

How the Step-Up Works for Inherited Property

Under federal tax law, when someone inherits property, the cost basis resets to its fair market value on the date the owner died. The original purchase price drops out of the picture.¹ This reset comes from Section 1014 of the Internal Revenue Code and applies broadly to property “acquired from a decedent,” including assets received by bequest, inheritance, or through certain trusts.²

A simple example shows why this matters. Suppose a decedent bought stock for $10,000 decades ago, and it was worth $100,000 on the date of death. The heir’s basis becomes $100,000. If the heir sells for $105,000, the taxable capital gain is just $5,000. Without the step-up, the gain would have been $95,000. For assets that have appreciated over a long holding period, this one rule can save tens or even hundreds of thousands of dollars in capital gains tax. The adjustment also works in the other direction: if property has declined in value, the basis steps down to the lower fair market value at death.

Why Disclaimed Assets Qualify

The legal mechanism is simple once you see it. 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.” Instead, 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.”³

In the context of a disclaimer trust, the assets are deemed to have passed directly from the decedent to the trust. The disclaiming spouse is treated, for tax purposes, as if they were never in the chain of ownership. Because the assets are considered acquired from the decedent, they fall within Section 1014’s rule granting a basis equal to fair market value on the date of death.² The disclaimer creates no gap or interruption that would jeopardize the step-up.

This is where disclaimers differ sharply from ordinary gifts. If the surviving spouse had accepted the inheritance and then transferred the assets into a trust, that would be a gift. Gifts do not receive a step-up. The recipient takes the donor’s original basis, known as carryover basis, and any appreciation built up during the decedent’s lifetime would eventually be taxed when the asset is sold. A qualified disclaimer avoids that entirely by erasing the spouse from the transfer chain before any acceptance occurs.

What Makes a Disclaimer Qualified

The step-up only works if the disclaimer qualifies under Section 2518. A disclaimer that fails any of these requirements is not a disclaimer at all for tax purposes. It is instead treated as a gift from the person who tried to disclaim, which pulls in gift tax consequences, destroys the direct-from-decedent treatment, and can cost the stepped-up basis along with it. The requirements are strict and mechanical:

In writing. The disclaimer must be a written, irrevocable, and unqualified refusal. An oral refusal or informal agreement does not count.⁴
Delivered to the right person. The written disclaimer must be received by the transferor, their legal representative, or the holder of legal title to the property.⁴
Filed within nine months. The disclaimer must be received no later than nine months after 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.⁴
No prior acceptance of benefits. 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 all constitute acceptance that permanently disqualifies the disclaimer.
No direction over where the property goes. The disclaimed property must pass without direction from the person disclaiming. The property must pass to the decedent’s spouse or to someone other than the person disclaiming.⁴

A beneficiary can also make a partial disclaimer, refusing a specific portion of the inheritance while accepting the rest. The portion disclaimed must be an undivided fractional share or a severable property interest.⁵ That flexibility is central to disclaimer trust planning, because the surviving spouse can calibrate exactly how much to disclaim based on the estate tax picture at the time of death.

No Second Step-Up at the Surviving Spouse’s Death

This is the part of disclaimer trust planning that catches people off guard. Assets in the trust get a step-up at the first spouse’s death, but they do not get another step-up when the surviving spouse dies. The whole purpose of a disclaimer trust is to keep those assets out of the surviving spouse’s taxable estate. That works perfectly for estate tax savings, but Section 1014 only grants a step-up for property included in a decedent’s gross estate or acquired from that decedent.² Assets sitting in a trust that the surviving spouse does not own and that are not included in the surviving spouse’s estate do not qualify.

The practical impact depends on how long the surviving spouse lives and how much the assets appreciate. If the first spouse dies and stock worth $500,000 goes into the disclaimer trust with a $500,000 stepped-up basis, and fifteen years later when the surviving spouse dies that stock is worth $1.2 million, the trust’s basis is still $500,000. The beneficiaries who ultimately receive the stock inherit a built-in $700,000 capital gain. Had the stock instead passed outright to the surviving spouse and been included in that spouse’s estate, it would have received a second step-up to $1.2 million, wiping out the gain entirely.

Whether a disclaimer trust still makes sense despite this tradeoff depends on the size of the estate, the expected appreciation, and the applicable estate tax rate. For very large estates, the estate tax saved by keeping assets out of the surviving spouse’s estate can far exceed the capital gains tax the beneficiaries will eventually pay. For smaller estates not near the estate tax threshold, the loss of the second step-up may cost more than it saves. This is exactly the kind of calculation the surviving spouse should run during the nine-month disclaimer window.

When the Step-Up Value Shifts to a Later Date

The date-of-death value is not always the figure that controls. The executor of an estate can elect to value all assets six months after the date of death instead. This election, authorized by Section 2032, is only available if it would both decrease the gross estate value and reduce the combined estate and generation-skipping transfer tax.⁶ If an asset is sold or distributed before the six months are up, its value locks in on the date of that sale or distribution.

When the executor makes this election, the step-up for inherited property, including assets in a disclaimer trust, adjusts to the alternate valuation date rather than the date of death. The trustee should keep the executor’s reported values as the authoritative record of basis in each asset. When the trust eventually sells, gain or loss is measured from that figure.

1
Internal Revenue Service. Gifts and Inheritances
2
Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
3
eCFR. 26 CFR 25.2518-1 – Qualified Disclaimers of Property; In General
4
Office of the Law Revision Counsel. 26 U.S. Code 2518 – Disclaimers
5
eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer
6
Office of the Law Revision Counsel. 26 U.S. Code 2032 – Alternate Valuation