Understanding Step-Up in Basis With a Living Trust: How It Saves Your Heirs Thousands

When most people think about trusts, they imagine avoiding probate, protecting assets, and keeping things private. But there’s another major benefit that many families overlook—the step-up in basis.

This single tax rule can save your beneficiaries tens of thousands of dollars (sometimes more) in unnecessary capital gains taxes. And the best part? When your assets are held in a properly set-up and funded living trust, your heirs can still receive this extremely valuable tax break.

Here’s a simple breakdown of what the step-up in basis is, how it works with a living trust, and why it’s one of the most powerful reasons to avoid adding your kids to title and instead use a trust.

What Is the Step-Up in Basis?

When someone inherits an asset—like a home, rental property, stocks, or land—the IRS allows the “cost basis” of that asset to reset to its fair market value on the date of death.

This is called the step-up in basis.

Why It Matters

Your cost basis determines how much capital gains tax your heirs must pay if they sell the asset.

Without a step-up:

• Your original purchase price becomes their tax basis

• They could owe massive taxes on decades of appreciation

With a step-up:

• Their tax basis resets to today’s market value

• Taxes are dramatically reduced—or sometimes eliminated completely

Example:If you bought a home for $150,000 and it’s worth $600,000 when you pass away, a full step-up raises the basis to $600,000.If your child sells it for $600,000, they owe $0 in capital gains tax.

Do You Still Get a Step-Up in Basis With a Living Trust?

Yes—absolutely.

A revocable living trust does not change your tax status while you’re alive.You still control the assets, still file taxes the same way, and still receive all the standard tax benefits—including the step-up in basis.

When you pass away, your heirs receive:

• A tax-free transfer

• Full step-up in basis

• Faster access to the asset

• No probate delays

This is one of the biggest advantages of using a living trust instead of adding someone to your deed.

The Danger: Adding Your Child to Your Home’s Title

Many parents add a child to their deed thinking:

• “It will avoid probate.”

• “It will be easier for them.”

• “It will protect the house.”

The truth?

It often creates tax problems, legal exposure, and loss of control.

Tax Consequences

When you add a child to title, you’re essentially giving them a portion of the home while you’re alive.

This means:

• The gifted portion does not receive a full step-up in basis

• Your child inherits your original cost basis for their portion

• They may owe tens of thousands in capital gains tax later

Many people unintentionally create a tax nightmare for their children by doing this.

A living trust avoids all these issues and keeps the step-up intact.

Which Assets Receive a Step-Up in Basis?

Most capital assets are eligible, including:

• Primary residences

• Rental properties

• Land or farms

• Vacation homes

• Stocks, bonds, and mutual funds

• Certain business interests

Note: Retirement accounts like IRAs and 401(k)s do not get a step-up because they’re taxable when withdrawn.

Joint Ownership and Step-Up Rules

Ownership structures impact how step-up works:

Joint Tenancy with Right of Survivorship

Surviving joint owners may only receive a partial step-up—often just 50%.

Community Property States

Spouses may receive a double step-up, meaning the entire property receives a step-up, not just half.

A trust can be drafted to preserve this benefit.

How a Living Trust Maximizes the Step-Up

A well-drafted trust helps you:

1. Preserve the Full Step-Up

Your heirs inherit at market value, minimizing or eliminating capital gains taxes.

2. Avoid Probate

They don’t deal with courts, delays, or fees.

3. Maintain Control During Your Lifetime

You can sell, refinance, move, or change beneficiaries at any time.

4. Protect Your Heirs

Even though your heirs receive the step-up, the trust can still protect the asset from:

• Creditors

• Divorces

• Mismanagement

• Lawsuits

5. Keep the Home in the Family

Your heirs can inherit the property easily without being forced into a sale.

When Should You Review Your Trust for Step-Up Protection?

You should review your trust if you:

• Added someone to your deed

• Bought or sold property since creating the trust

• Moved to a new state

• Haven’t updated your plan in 5+ years

• Own rental properties or highly appreciated assets

A quick review ensures your trust is drafted to preserve and maximize step-up benefits.

Bottom Line

The step-up in basis is one of the most powerful tax tools available—and a living trust ensures your heirs don’t lose it.

A trust helps you:

• Protect your assets

• Preserve tax benefits

• Avoid probate

• Reduce family conflict

• Transfer wealth cleanly and efficiently