Properly Funding Your Revocable Trust Is the Key to Unlocking Its Benefits
If your estate plan includes a revocable trust — also known as a “living” trust — it’s critical to ensure that the trust is properly funded....
2 min read
Maurice La Verdure
:
May 8, 2025 12:08:47 PM
If you inherit assets after a loved one passes away, they often arrive with a valuable — but frequently misunderstood — tax benefit called the step-up in basis. Below is an overview of how the rule works and what planning might need to be done.
What “basis” means
First, let’s look at a couple definitions. Basis is generally what the owner paid for an asset, adjusted for improvements, depreciation, return of capital, etc. Capital gain (or loss) equals the sale price minus the basis.
At death, many capital assets (stocks, real estate, business interests, collectibles, crypto, etc.) are stepped up (or down) to their fair market value (FMV) as of the date of death (or, if elected by the executor, the “alternate valuation date” six months later). The heir’s new basis is that FMV, erasing the tax on any unrealized gain or loss that accumulated during the deceased person’s life.
For example, your father bought ABC stock many years ago for $50,000. At his death, it’s worth $220,000. Your inherited basis is $220,000. If you sell immediately for $220,000, there’s no capital gains tax. Hold it and sell later for $260,000 and you’ll only recognize the $40,000 gain since the date of death.
Some assets don’t receive a stepped-up basis. For example, 401(k)s and IRAs are excluded.
Actions for heirs and future estates
There are some steps that heirs and individuals planning their estates can take.
After a death, heirs should:
Asset owners planning ahead should:
Good records and proactive planning
These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. And gifts made just before a person dies (sometimes called “death bed gifts”) may be included in the gross estate for tax purposes.
Reach out to us for tax assistance when estate planning or after receiving an inheritance. We’ll help you chart the most tax-efficient path forward.
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