Technical article
United States: No Step-up in Basis for What Sits in an Irrevocable Trust
A reset at death, often called a step-up, moves the basis to the market value on the day the owner dies.
Picture a retired couple in Arizona who bought shares for US$1 million many years ago. The shares are now worth US$6 million. These are example figures. They could leave the shares to their daughter in their wills, or place them in an irrevocable trust that lasts for the daughter, her children and theirs. Does the daughter get a tax-free reset of the cost on those shares?
The answer depends on which way the shares travel.
What the reset is
Cost basis is the starting number used to work out a gain when an asset is sold. A reset at death, often called a step-up, moves the basis to the market value on the day the owner dies. The gain that built up during the owner's life is not taxed when the heir sells.
The US tax code gives that treatment to property acquired from a person who dies. It lists the kinds of property that qualify: property in the estate, a revocable trust, and a trust whose terms the dying person could change. Section 1014 of the tax code is the source.
What the list leaves out
An irrevocable trust that sits outside the estate does not appear on the list. The code does not say this in one sentence. It is a reading of the list: property that left the estate generally has no reset when the person dies.
The same trust then keeps the original basis. When the trustee sells shares that cost US$1 million and are worth US$6 million, the gain is the full difference. The trust pays tax on gains it keeps, at trust rates.
The trade-off in the sources
The two sides of the same choice look like this.
| Where the property sits at death | Basis reset | Estate tax at death |
|---|---|---|
| In the estate, or in a trust the person could change or revoke | Yes | Applies above US$15,000,000 per person in 2026, at 40% |
| In an irrevocable trust outside the estate | Generally no | Does not apply to that property |
Property comes back into the estate when the person kept income from it, or kept the right to decide who enjoys it. The sources call that retained-power rule section 2036. A person who keeps those powers gets the reset, and the property counts toward the estate tax. A person who gives them up gets no reset, and the property is outside the estate tax.
For a family whose total estate is below US$15,000,000 per person, the estate tax in the right-hand column may never apply, and the reset in the middle column may then be the larger factor. For a family above that level, the two columns pull in different directions.
Why it grows with time
A trust meant to last for generations holds assets for a long time. Gains build up inside it while the original cost stays in place. Separately, the tax on skipping a generation can apply at each stage.
You could
You could ask a trustee or lawyer two questions: which assets in the trust have the largest built-up gain, and what the plan is for selling them. You could also ask what the family gives up if a power is kept to pull the assets into the estate again.
What have you weighed between a reset for your heirs and keeping the estate small? Tell us. Someone facing the same pair of choices may find it useful.
Figures are estimates for planning, based on public data. Date read: October 2026.
Sources
- Cornell LII 26 USC 1014 (A)
- Cornell LII 26 USC 2036 (A)
- IRS What's New estate and gift tax (A)
- Cornell LII 26 USC 643 (A)
- IRS Instructions for Form 1041 (A)
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