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Step-Up in Basis & Irrevocable Trusts: What Texas Families Need to Know (2025)

If you’re thinking about creating a trust or already have one in place, you may be wondering: “Will my heirs get a step-up in basis if I transfer assets into an irrevocable trust?”

It’s a great question—and one that can have major tax consequences if misunderstood. So let’s break it down: what a step-up in basis is, how it interacts with irrevocable trusts, and what smart Texas estate planning should look like in 2025.

First—What Is a Step-Up in Basis?

When someone passes away, the cost basis of certain inherited assets (like real estate or stock) gets “stepped up” to the fair market value at the date of death.

Example:

Let’s say your dad bought a rental home in 1990 for $100,000. When he passes away, it’s worth $400,000. If you inherit it, your new tax basis is $400,000, not $100,000.

If you sell it for $410,000, you only pay capital gains tax on $10,000, not $310,000.

That’s the power of the step-up—it dramatically reduces capital gains tax for heirs.

What Is an Irrevocable Trust?

An irrevocable trust is a trust that, once established, generally cannot be changed or revoked by the person who created it (the grantor).

People use irrevocable trusts to:

• Protect assets from creditors

• Reduce estate taxes

• Qualify for Medicaid or long-term care benefits

• Control how and when assets are distributed

But here’s the kicker: you usually give up control of the assets placed in the trust. And that control—or lack thereof—plays a big role in whether the assets get a step-up in basis.

Do Assets in an Irrevocable Trust Get a Step-Up in Basis?

It depends. The key question is: Are the assets included in the grantor’s estate when they die?

✅ If the Assets Are Included in the Grantor’s Estate:

Then the beneficiaries can receive a step-up in basis.

This typically happens when:

• The trust is a grantor trust, meaning the grantor is still treated as the owner for income tax purposes

• The grantor retains certain powers or interests in the trust

❌ If the Assets Are Not Included in the Estate:

Then there’s no step-up in basis, and heirs may pay more in capital gains tax.

This is often the case for non-grantor irrevocable trusts used to remove assets from the taxable estate.

Real-Life Example: Two Trusts, Two Outcomes

Scenario A: Your mom places a $500,000 rental home into an irrevocable grantor trust, keeping the right to substitute assets and receive income. When she dies, the property is included in her estate—and your tax basis is stepped up to $500,000.

Scenario B: Your dad puts that same home into an irrevocable non-grantor trust, giving up all control. When he dies, the home is not part of his estate—so the basis stays at the original $100,000. You could owe taxes on $400,000 of gains if you sell.

Why This Matters in Texas

Texas doesn’t have a state-level estate tax, which is great—but capital gains taxes still apply at the federal level. So if your trust planning ignores basis step-up, your heirs could end up with a huge tax bill.

Especially for:

• Highly appreciated real estate

• Family businesses

• Stock portfolios or mineral interests

In short: step-up in basis can mean the difference between paying taxes on $0 or $500,000.

What Should You Do?

🔍 Review Your Existing Trust

If you already have an irrevocable trust, have an attorney review it to determine whether it’s structured to allow a step-up in basis.

🧠 Plan With Tax in Mind

Talk to an estate planning lawyer who understands the balance between asset protection and tax efficiency.

Sometimes, giving up estate tax savings in exchange for a step-up in basis is a smarter move—especially when the estate is under the federal exemption limit (currently over $13 million in 2025).

👨‍👩‍👧‍👦 Customize It

The right strategy for one family may be totally wrong for another. A good trust should reflect your specific goals—minimizing tax, protecting family, preserving wealth.

How The Lange Firm Helps

At The Lange Firm, we help Texas families:

• Evaluate existing trusts and estate plans

• Structure trusts that preserve the step-up in basis when possible

• Balance Medicaid planning, tax planning, and asset protection

• Avoid common pitfalls in irrevocable trust design

Whether you’re starting fresh or revisiting a trust created years ago, we’ll make sure your estate plan works as intended—for you and your heirs.

Final Takeaway

Yes, assets in an irrevocable trust can get a step-up in basis—but only if the trust is set up correctly.

Don’t leave it to chance. A poorly structured trust can cost your family tens of thousands in taxes.

Contact The Lange Firm today for a customized estate planning review that makes sense for 2025 and beyond.