Understanding the Step-Up in Basis With a Living Trust

Written by Jocelyn Waters

Published December 2025

When people create a living trust, they often do it to avoid probate, keep things private, and make life easier for their loved ones. What many don’t realize is that a living trust can also play an important role in reducing capital gains taxes through something called a step-up in basis.

This concept can have a huge financial impact on heirs, especially when real estate or long-held investments are involved.

What Is “Basis,” Anyway?

Your basis is essentially what you paid for an asset, plus certain improvements or costs. It’s used to calculate capital gains tax when that asset is sold.

Example:

• You bought a home years ago for $200,000.

• At your death, the home is worth $600,000.

• The $400,000 difference matters a lot for taxes.

What Is a Step-Up in Basis?

A step-up in basis means that when someone inherits an asset, the IRS resets the asset’s value to its fair market value on the date of death (or an alternate valuation date, in some cases).

Using the example above:

• Original basis: $200,000

• Value at death: $600,000

• New basis for heirs: $600,000

If your heirs sell the home shortly after inheriting it for $600,000, there may be little to no capital gains tax owed.

Without a step-up, heirs could owe taxes on the entire $400,000 gain.

How Does a Living Trust Fit In?

A revocable living trust does NOT eliminate the step-up in basis—and that’s good news.

Assets held in a properly drafted living trust are still considered part of your estate for tax purposes. That means they generally do receive a step-up in basis at death, just like assets passed through a will.

So:

• You keep control of your assets during your lifetime

• Your heirs avoid probate

• Your heirs may also avoid significant capital gains taxes

Common Misconceptions

“If I put my house in a trust, my kids lose the step-up.”Not true. A standard revocable living trust preserves the step-up in basis.

“I should add my kids to the deed now.”This can actually be a costly mistake. Gifting property during your lifetime often eliminates the step-up, potentially triggering large capital gains taxes later.

“Trusts are only for wealthy people.”Anyone with a home, savings, or investments can benefit from proper trust planning.

Why This Matters for Families

With rising property values, especially in states like Utah, Arizona, and California, many families are sitting on assets that have appreciated dramatically over time. A step-up in basis can mean the difference between:

• Keeping wealth in the family

• Or losing a large portion of it to unnecessary taxes

The Bottom Line

A living trust is not just about avoiding probate—it’s about protecting your legacy and making smart tax decisions for the people you love.

Because tax laws and individual situations vary, it’s important to work with a qualified estate planning attorney to ensure your trust is structured correctly.

If you have questions about how a living trust works, how assets should be titled, or whether your current plan protects the step-up in basis, getting guidance sooner rather than later can make all the difference.

Have questions about living trusts or estate planning?

I’m happy to help point you in the right direction.