Will Assets in Joint Revocable Trust Get Step-up When Surviving Spouse Dies?
Our assets are in a revocable living trust. These assets include stock mutual funds, among other assets. When the last of us dies, is there a step-up in cost basis to that date of death for assets in the trust?
The answer depends on how the trust is written. It sounds like you have a joint revocable trust rather than one created by either you or your spouse individually. If that’s correct and the trust remains revocable after the first of you passes away, then its assets will be in the taxable estate of the surviving spouse and will receive a step-up in basis upon their death (meaning that the capital gain on the sale of the assets will be determined based on their date-of-death value rather than their purchase price). If, on the other hand, the trust becomes irrevocable after the first spouse passes away, then it may not receive a full step-up in basis upon the survivor’s death. In that case, the result will depend on how the trust is written and, at least for half the trust assets, will be treated like a trust created by the deceased spouse.
A trust that you or your spouse created as the sole grantor will become irrevocable upon that spouse’s death. It may or may not be included in the surviving spouse’s estate and receive a second step-up in basis depending on how it is written and potentially what elections the surviving spouse takes after the death of the first spouse. So-called “QTIP” trusts permit the surviving spouse to determine whether the funds in trust will or will not be in their taxable estate. The surviving spouse can compare the potential estate and capital gains tax implications and make the decision that is likely to bring the best tax results. Either way, it will get a step-up in basis upon the first spouse’s death. And it may or may not get a second step-up upon the survivor’s death.
I’m sorry that this is a somewhat complicated analysis. You may need to consult with the attorney who drew up the trust or another estate planning lawyer to get a definitive answer.