Step-Up in Basis & Irrevocable Trusts: What Changed

Whether an irrevocable trust gets a step-up in basis depends entirely on whether its assets are included in the grantor's taxable estate at death — and since 2023, an IRS ruling has made clear that many common asset-protection and Medicaid trusts don't qualify.

Does an Irrevocable Trust Get a Step-Up in Basis?

The step-up in basis only applies to assets included in a decedent's gross estate for federal estate tax purposes — so an irrevocable trust gets one only if its assets are still considered part of the grantor's taxable estate when they die.

This is the rule that trips up a lot of estate planning, because "irrevocable" and "outside my taxable estate" sound like they should always go together, but they don't. Some irrevocable trusts are deliberately structured to keep assets inside the grantor's taxable estate — accepting the estate tax cost in exchange for the step-up in basis. Others are structured specifically to remove assets from the estate, for Medicaid planning, creditor protection, or to lock in a gift tax exemption before it changes — and those trusts generally lose the step-up as a trade-off.

Also Read: What Is an Irrevocable Trust? How It Works

IRS Revenue Ruling 2023-2 Changed the Calculus

In March 2023, the IRS issued Revenue Ruling 2023-2, confirming that assets in an irrevocable grantor trust do not get a step-up in basis at the grantor's death if those assets were never included in the grantor's taxable estate to begin with.

"Revenue Ruling 2023-2 changed step-up basis rules for irrevocable grantor trusts" by clarifying that "assets held in an irrevocable grantor trust not included in the grantor's taxable estate will not receive a step-up in basis upon the grantor's death." — Clark Allison

Before this ruling, some practitioners had argued that grantor trust status alone — the grantor paying income tax on the trust's income — might be enough to also justify a step-up in basis, even when the assets weren't in the taxable estate. The IRS shut that argument down directly.

"No step-up in basis is available for assets in an irrevocable trust where the individual creating the trust retains a power that causes the individual to be the owner of the entire trust for income tax purposes but does not cause the trust assets to be included in the individual's gross estate." — Shannon Carlson, CPA, MAcc, writing in The Tax Adviser

The Trade-Off: Step-Up vs. Asset Protection

Estate planners now frame it as a binary choice: a grantor can structure a trust so its assets are includible in their taxable estate and get the step-up, or structure it to stay out of the estate and keep the asset-protection and exemption-locking benefits — but generally not both.

For a smaller estate that's comfortably under the federal estate tax exemption anyway, choosing the estate-inclusion side often makes sense — there's little or no estate tax cost, so getting the step-up is close to a free benefit. For a larger estate, or one built specifically around Medicaid or creditor protection, the calculus flips, and giving up the step-up is usually the accepted cost of the protection the trust was built to provide.

This is also why the federal estate tax exemption amount itself matters so much to this decision, and why it's worth revisiting periodically rather than setting a trust structure once and assuming it stays optimal. The exemption has changed significantly over the past two decades and is scheduled to shift again depending on future legislation, so a trust structured around today's exemption level may need a fresh look in a few years as the numbers change.

What This Means for Medicaid and Asset Protection Trusts

Most irrevocable trusts used specifically for Medicaid planning or asset protection are deliberately structured to remove assets from the grantor's taxable estate — which means, post-2023, beneficiaries inheriting through them should expect to inherit the grantor's original cost basis rather than a stepped-up one.

That's a meaningful detail families often miss when comparing planning tools. A home placed in a Medicaid asset protection trust years before a parent's death may avoid Medicaid estate recovery and probate — but if it's also excluded from the parent's taxable estate, the children who eventually inherit it could owe more in capital gains tax when they sell than they expected, because they're carrying forward the parent's original purchase price as the cost basis instead of the home's value at death.

Comparing the actual numbers — estimated estate tax exposure if any, versus likely capital gains tax on the eventual sale — before choosing a trust structure is exactly the kind of analysis worth doing with an attorney or CPA rather than assuming a step-up is automatic.

Also Read: See What Solves This in Minutes

In Short

An irrevocable trust only gets a step-up in basis if its assets remain part of the grantor's taxable estate at death. IRS Revenue Ruling 2023-2 confirmed that trusts built to keep assets out of the estate — the common structure for Medicaid planning, creditor protection, and exemption-locking — generally do not get the step-up, even when the grantor is treated as the owner for income tax purposes. That makes it a genuine trade-off: estate inclusion and the step-up, or estate exclusion and stronger asset protection, not both.

What You Also May Want To Know

Does a revocable living trust still get a step-up in basis?

Yes. Revenue Ruling 2023-2 applies specifically to irrevocable grantor trusts whose assets are excluded from the grantor's estate. Revocable trusts, by definition, keep their assets in the grantor's taxable estate, so the normal step-up rule still applies in full.

What is cost basis, and why does it matter for an inheritance?

Cost basis is the value used to calculate capital gains tax when an asset is eventually sold. A step-up resets that basis to the asset's value at the date of death, often substantially reducing the taxable gain compared to the original purchase price.

Can a trust be redesigned to qualify for a step-up?

Sometimes, through techniques like adding a general power of appointment that pulls the assets back into the grantor's taxable estate, but doing so usually reduces or eliminates the asset-protection benefits the trust originally provided. This is a decision to make with an attorney, weighing the specific numbers on both sides.

Does Revenue Ruling 2023-2 apply retroactively to trusts already created?

The ruling clarifies existing law rather than creating a new rule going forward only, so it can affect the tax treatment of trusts created before 2023 as well. Anyone relying on an older trust structure for a step-up should confirm its actual estate-inclusion status with a tax professional.

Reviewed and Updated on June 29, 2026 by George Wright