Step Up in Basis and Trusts

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If you own property in Atlanta, Georgia, you probably know that real estate and investments can grow significantly in value over time. That growth is great news while you’re alive. But when your heirs eventually sell those assets, they could face a large capital gains tax bill, unless your estate plan is set up correctly. That’s where the step-up in basis rule comes in. Understanding how this rule works with your trust is one of the most important things you can do for your family’s financial future. At Slowik Estate Planning, located in Atlanta, Georgia, we help Georgia families build estate plans that protect their assets and minimize unnecessary taxes for the people they love.

Table of Contents

What Is the Step-Up in Basis?

The step-up in basis rule generally resets the tax basis of an inherited asset to its fair market value as of the date the owner died. This adjustment can eliminate capital gains tax on any increase in the asset’s value that occurred during the original owner’s lifetime. That is a powerful tax benefit, and it can save your heirs a significant amount of money.

Here is a simple example. Say you bought a rental property in Atlanta 25 years ago for $150,000. Today, that property is worth $900,000. If you sold it yourself, you would owe capital gains tax on $750,000 of profit. But if your heir inherits the property at your death, the tax basis of the property is essential for calculating future capital gains tax. When a person sells an asset, the IRS generally taxes the profit, which is the difference between the total amount realized from the sale and the asset’s adjusted tax basis. Because the basis resets to $900,000 at your death, your heir could sell the property shortly after and owe little or no capital gains tax.

According to Section 1014 of the Internal Revenue Code, if a person holds property at death, it will receive a new basis equal to the fair market value of the property at the person’s date of death. In the case of appreciated assets, the rule allows people to inherit the assets, such as stocks or real estate, without inheriting the tax burden that’s triggered by capital gains. This is known as a step-up in basis.

Georgia has no state inheritance or estate tax, but federal estate tax rules still apply to large estates. Inherited property benefits from a stepped-up basis, reducing potential capital gains taxes on a sale. That makes the step-up in basis especially valuable for Georgia families who hold appreciated real estate or investment accounts. Working with an estate planning attorney in Atlanta is the best way to make sure your plan is structured to take full advantage of this rule.

How Trusts Affect Your Step-Up in Basis

Not all trusts are treated the same way under federal tax law. The type of trust you use has a direct impact on whether your heirs receive a step-up in basis when you die. Getting this wrong can cost your family thousands, or even hundreds of thousands, of dollars in unnecessary taxes.

If an owner holds stock shares in the name of their revocable living trust, the same stepped-up basis adjustment would occur at their death. Assets titled in the name of a revocable living trust qualify for basis adjustment because an asset transfer from a revocable living trust is considered a Section 1014 “bequest” and those assets are still considered part of the taxable estate. So if you have a revocable living trust, your heirs are generally in good shape when it comes to the step-up in basis.

Irrevocable trusts are a different story. The assets of an irrevocable trust would generally not be included in the grantor’s taxable estate upon death unless the powers retained by the grantor were so significant that it was essentially deemed to be the equivalent of a revocable trust for purposes of valuing the gross estate. When assets are not included in the taxable estate, the step-up in basis may not apply.

When lifetime gifts are made from an estate for estate tax purposes, the recipient, including irrevocable trusts created for the benefit of a donor’s family, takes the donor’s basis in the asset. At the donor’s death, the assets owned by the irrevocable trust do not receive a step-up in basis. Conversely, assets owned by the decedent, including assets in the decedent’s revocable living trust, obtain a step-up in income tax basis equal to the asset’s fair market value at the owner’s death. This is a critical distinction that every Georgia family with a trust needs to understand. Reach out to Slowik Estate Planning to review your current trust structure and make sure it is working in your family’s best interest.

Rev. Rul. 2023-2 and What It Means for Georgia Families

In 2023, the IRS issued a ruling that changed how many estate planners think about irrevocable grantor trusts. In March 2023, the Internal Revenue Service made Revenue Ruling 2023-2, clarifying their interpretation of Internal Revenue Code Section 1014 regarding irrevocable trust basis adjustment at death. This ruling focused specifically on irrevocable grantor trusts commonly referred to as Intentionally Defective Grantor Trusts (IDGTs). An IDGT is a type of irrevocable trust that treats the grantor as the trust owner for income tax purposes, but the assets contributed to the trust are not included in the gross estate of the grantor at their death.

Rev. Rul. 2023-2 confirms that the assets of an irrevocable grantor trust not includable in the grantor’s gross estate do not receive a basis adjustment under Internal Revenue Code Section 1014. This was a significant clarification. Many families had assumed their IDGT assets would receive a step-up in basis. Rev. Rul. 2023-2 made clear that assumption was wrong.

The ruling is grounded in the plain language of the law. Under IRC Section 1014(b), only certain categories of property qualify for a basis adjustment. Section 1014(b) lists seven types of property that qualify for this stepped-up basis, including property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent. Assets transferred into an irrevocable trust during the grantor’s lifetime, as a completed gift, do not fall into any of those seven categories.

Based on the fact that the trust assets were not includable in the owner’s gross estate, the ruling concludes that the assets do not receive a step-up (or down) in basis; rather, the assets retain the same basis as just before the owner’s death. For families with highly appreciated assets held in these trusts, that means their beneficiaries could face a large capital gains tax bill when they sell. This is exactly why a review of your existing trust documents matters so much. Our team at Slowik Estate Planning can walk you through your options for Estate Tax Planning in Atlanta Georgia and help you weigh the tradeoffs carefully.

The Federal Estate Tax Exemption and Your Planning Strategy in 2026

The federal estate tax rules changed significantly in 2025, and those changes affect how you balance estate tax planning with the step-up in basis. Effective January 1, 2026, the One Big Beautiful Bill Act permanently raised the federal estate, gift, and generation-skipping transfer tax exclusion amount to $15 million per person. The exemption amount will continue to be indexed for inflation. Other than the increased exemptions, the estate and gift tax system was largely left unchanged. The tax rate remains at 40%.

The new law retains the step-up in basis at death, meaning heirs will still inherit appreciated assets at the asset’s fair market value on the deceased person’s date of death. That is good news for Georgia families. But the increased exemption also changes the calculus around irrevocable trust planning. With a $15 million exemption per person, many families no longer need to aggressively move assets out of their taxable estate to avoid federal estate tax. In fact, doing so could cost their heirs the step-up in basis.

Taxpayers should consider the potential tradeoffs of utilizing the increased exemption amounts during their lifetimes to gift assets to others, as opposed to retaining appreciated assets until their death so that those assets receive a stepped-up income tax basis. Taxpayers may want to consider retaining low-basis assets, which would then be included in their taxable estates and receive a step-up in income tax basis, while prioritizing high-income tax basis assets for potential lifetime gift transactions.

Every family’s situation is different. Some families will benefit from keeping assets in their taxable estate to preserve the step-up in basis. Others may still benefit from irrevocable trust structures for reasons like asset protection or International Estate Planning. The right answer depends on the size of your estate, the types of assets you hold, and your goals for your heirs. Slowik Estate Planning works with Atlanta families to find the right balance.

Strategies to Preserve the Step-Up in Basis Through Trust Planning

The good news is that even if you already have an irrevocable trust in place, there may be options to improve your family’s tax position. If you were given assets in an irrevocable trust that is excluded from your estate for estate tax purposes, it is possible to modify that trust to provide a stepped-up basis on the trust assets at the death of the person who gave you the assets, or potentially at your death. The IRS has recently blessed the modification of such trusts to include formula clauses that achieve maximum basis step-up without causing an estate tax. All irrevocable trusts should be reviewed to achieve these tax savings.

Under Georgia law, the Revised Georgia Trust Code of 2010 (O.C.G.A. Title 53, Chapter 12) provides a framework for trust modification and administration. Article 3 of the Revised Georgia Trust Code addresses revocation, modification, and termination of trusts under O.C.G.A. §§ 53-12-40 through 53-12-45. This means there may be legal pathways in Georgia to modify an existing trust to improve its tax efficiency, including preserving step-up in basis opportunities for beneficiaries.

When you create an estate plan, using the federal tax rules to provide a step-up in basis for assets can make a substantial difference in tax liability for your beneficiaries. Assets do not automatically receive a stepped-up basis when they are inherited. Your estate plan must be carefully structured with assistance from a knowledgeable estate planning attorney to take advantage of the federal tax rules that provide a stepped-up basis for inherited assets.

One proven approach is to keep appreciated, low-basis assets inside a revocable living trust or in your own name, so they are included in your taxable estate at death. You can still use irrevocable trust structures for goals like asset protection, but you should work with an attorney to make sure you are not sacrificing the step-up in basis unnecessarily. Another option is to use powers of appointment or other trust provisions that cause trust assets to be included in a beneficiary’s estate at death, triggering a basis adjustment at that point. These strategies require careful drafting and a thorough understanding of both federal tax law and Georgia trust law. The Atlanta estate planning lawyer at Slowik Estate Planning can help you review your current plan and identify the best path forward for your family.

FAQs About Step-Up in Basis and Trusts in Atlanta, Georgia

Does Georgia have its own step-up in basis rule?

No, Georgia does not have its own separate step-up in basis rule. Georgia follows the federal rule under IRC Section 1014. Georgia also has no state inheritance tax or estate tax, so the primary tax concern for most Georgia families when it comes to inherited assets is the federal capital gains tax. The step-up in basis under federal law can reduce or eliminate that tax for your heirs. Working with an estate planning attorney in Atlanta is the best way to make sure your assets are structured to take full advantage of this federal rule.

Will my revocable living trust qualify for the step-up in basis?

Yes, in most cases it will. Assets held in a revocable living trust are still considered part of your taxable estate at death. Because you retain control over those assets and can revoke the trust at any time, they qualify as property acquired from a decedent under IRC Section 1014(b). That means your heirs will generally receive a stepped-up basis equal to the fair market value of those assets on the date of your death. This is one of the main tax advantages of using a revocable living trust as the foundation of your estate plan.

What happens to the step-up in basis if I put assets in an irrevocable trust?

If you transfer assets to an irrevocable trust as a completed gift, and those assets are not included in your taxable estate at death, they will generally not receive a step-up in basis under IRS Rev. Rul. 2023-2. The basis of those assets immediately after your death will be the same as the basis immediately before your death. That means your beneficiaries could owe capital gains tax on all of the appreciation that occurred during your lifetime when they eventually sell. This is a major planning consideration, especially for families with highly appreciated real estate or investment accounts in irrevocable trusts.

Can I modify an existing irrevocable trust to preserve the step-up in basis?

In some cases, yes. The Revised Georgia Trust Code of 2010, under O.C.G.A. Title 53, Chapter 12, provides certain pathways for modifying irrevocable trusts, including through court modification or non-judicial settlement agreements. On the federal tax side, the IRS has indicated that formula clauses and certain trust modifications can be used to achieve a stepped-up basis without triggering estate tax. Every trust is different, so the right approach depends on how your trust was drafted and what powers are retained. Slowik Estate Planning can review your existing trust documents and advise you on whether modification is possible and beneficial for your family.

How does the 2026 federal estate tax exemption change my planning options?

The One Big Beautiful Bill Act, signed into law on July 4, 2025, permanently raised the federal estate, gift, and generation-skipping transfer tax exemption to $15 million per person, effective January 1, 2026. This means most Georgia families will not owe federal estate tax. As a result, the tradeoff between estate tax savings and the step-up in basis has shifted. For many families, it now makes more sense to keep appreciated assets in their taxable estate to preserve the step-up in basis for their heirs, rather than transferring those assets to an irrevocable trust to reduce estate taxes. Every situation is different, and Slowik Estate Planning can help you review your current plan in light of the new rules.

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