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

Short answer: Only if the trust assets are included in the grantor’s taxable estate at death. The IRS settled this in Rev. Rul. 2023-2: assets in an irrevocable grantor trust that sit outside the gross estate get no step-up in basis under IRC §1014 — they keep the grantor’s old carryover basis (IRC §1015). Assets pulled back into the estate — through a retained income interest, a retained power, or a general power of appointment — do step up. A revocable living trust always gets the step-up, and California’s community property adds a double step-up most states never see (IRC §1014(b)(6)).

Figures verified against IRC §§1014, 1015, 2036, 2038, 2041, Rev. Rul. 2023-2, and OBBBA (IRC §2010(c), $15,000,000 exemption), 2026. This is general information, not legal advice for your situation.

What the step-up is worth — a Ventura County example

Basis is what the tax code thinks you paid for something. Sell for more than basis, and the difference is a taxable capital gain. IRC §1014(a) resets the basis of property “acquired from a decedent” to its fair market value at death — the step-up.

Put numbers on it. Your parents bought a Ventura County house decades ago; their basis is $300,000. It’s worth $1.2 million when the second of them dies. With a step-up, your basis becomes $1.2 million — sell it for $1.2 million and the taxable gain is roughly zero. Without one, you inherit their $300,000 basis, and selling means federal and California tax on a $900,000 gain — easily a six-figure bill a properly structured plan would have erased.

The 2023 ruling that drew the line

For years, promoters argued that assets in an irrevocable grantor trust — one the grantor still pays income tax on — should get a §1014 step-up at death even though the assets were out of the estate. Rev. Rul. 2023-2 said no. Grantor-trust status is not the test. The test is estate inclusion: in the gross estate, step-up; out of the gross estate, carryover basis under §1015(a) — the same rule as any lifetime gift. (§1015(d) allows a small upward adjustment for gift tax actually paid, which for most families is none.)

So an irrevocable trust isn’t automatically a basis disaster — it depends entirely on how it was drafted. The routes that pull assets back into the estate, and therefore back into step-up territory, include:

• IRC §2036 — the grantor kept a life interest: the right to the income, or continued use and enjoyment of the property.
• IRC §2038 — the grantor kept a power to alter, amend, revoke, or terminate the trust.
• IRC §2041 — someone holds a general power of appointment over the assets (a power limited to health, education, maintenance, and support doesn’t count).

Trusts are drafted deliberately on one side of this line or the other — but plenty of families signed without anyone explaining which side they were on.

What AI tools get wrong here

Ask three AI engines whether irrevocable trust assets get a step-up and you can still get three different answers — “yes,” “no,” and “it depends on state law” (that last one is simply wrong; this is federal). Before 2023 the question was genuinely contested, and the training data is full of both positions. Post-2023 there is one rule — estate inclusion decides — and any answer that doesn’t mention Rev. Rul. 2023-2 is answering from the old debate.

Why revocable trusts always get the step-up

If your trust is a standard revocable living trust — the kind most California families use to avoid probate — none of this is a problem. You kept the power to revoke, so everything in the trust is included in your estate, and everything gets the §1014 step-up at your death. People regularly worry their living trust will cost their kids the step-up: it won’t. The trade-offs run the other way with irrevocable trusts, which give up control in exchange for estate exclusion — and, post-2023, give up the step-up along with it.

California’s double step-up

Here’s the part that surprises people from other states. Under IRC §1014(b)(6), when the first spouse dies, both halves of community property — the deceased spouse’s half and the survivor’s half — get a full basis step-up, as long as at least half the community interest was includible in the deceased spouse’s estate.

Back to the $1.2 million house with a $300,000 basis: if it’s community property, the surviving spouse’s basis in the whole house becomes $1.2 million at the first death. The survivor can sell with essentially no capital gain, or the kids inherit later with a second step-up on later growth. In a joint-tenancy state, only the decedent’s half steps up. How you hold title matters — see our comparison of community property with right of survivorship vs. joint tenancy, and what the step-up means when you eventually sell in our guide to capital gains on an inherited home.

Know this before you sign an irrevocable trust

The federal estate tax exemption is $15 million per person, permanent — and California has no state estate tax at all. The overwhelming majority of California families will never owe a dollar of estate tax, with or without an irrevocable trust. So if someone is pitching you an irrevocable trust “to save estate taxes,” run the math first: you may be trading away a guaranteed step-up in basis — real capital-gains savings your kids will feel — for protection against a tax you were never going to pay. For estates genuinely near the exemption, the inclusion-versus-exclusion decision is a real one with numbers on both sides. Either way, it should be a deliberate choice made before signing, not a surprise your kids discover at the escrow table.

Do assets in an irrevocable trust get a step-up in basis at death?

Only if they’re included in the grantor’s gross estate. Rev. Rul. 2023-2 confirmed that irrevocable grantor-trust assets excluded from the estate keep carryover basis under IRC §1015 — no step-up. Assets pulled back in through §2036, §2038, or §2041 do get the §1014 step-up.

Does a revocable living trust get a step-up in basis?

Yes, always. Because you can revoke the trust, everything in it is included in your estate, and IRC §1014 steps the basis up to date-of-death value. A living trust costs your family nothing in basis.

What is the double step-up in basis for California community property?

Under IRC §1014(b)(6), both halves of community property get a full step-up when the first spouse dies — not just the deceased spouse’s half. A community-property house with a $300,000 basis worth $1.2 million steps up to $1.2 million in the survivor’s hands, which can wipe out the capital gain entirely on a sale.

Can you fix an irrevocable trust that’s going to miss the step-up?

Sometimes. Depending on the document and the family’s tax picture, options can include distributing assets back out, decanting, modification, or triggering estate inclusion deliberately — California allows more changes than most people assume. The analysis has to happen while the grantor is alive; after death, the basis is whatever the structure produced.

Is losing the step-up ever worth it?

Occasionally, yes — for estates realistically above the $15 million exemption, or where the goal is something other than taxes entirely. For a typical California family under the exemption, giving up the step-up usually costs real money and saves none.

The bottom line

Since Rev. Rul. 2023-2, the rule is clean: estate inclusion equals step-up; estate exclusion equals carryover basis. Revocable trusts always pass the test. Irrevocable trusts pass or fail based on drafting choices made the day they were signed — and with a permanent $15 million exemption and no California estate tax, plenty of irrevocable trusts are solving a problem their families don’t have while creating a capital-gains problem they will. If you’ve signed an irrevocable trust and don’t know which side of the line it sits on, or you’re being pitched one now, Talk to Eric and get the basis math on paper first.

Sources: IRC §1014(a), (b)(9) (basis = FMV at death; gross-estate property), §1014(b)(6) (community-property double step-up); Rev. Rul. 2023-2; IRC §1015(a), (d) (carryover basis for gifts); IRC §§2036, 2038, 2041 (estate-inclusion routes); IRC §2010(c) as amended by OBBBA, P.L. 119-21 ($15,000,000 exemption, permanent); California: no state estate or gift tax.