Understanding Step-up in Basis for Assets When Converting from Revocable to Irrevocable Trust

You're asking some great questions about trusts and basis issues. Let me walk through this with you. For your first question about the home sale: Yes, your understanding is correct. Since a revocable trust is considered a "grantor trust" for tax purposes, the IRS essentially ignores it. The home is still treated as if your parents own it directly. If they meet the ownership and use tests (living there 2 out of the last 5 years), they can absolutely claim the $250K exclusion per person ($500K if married filing jointly). For your second question about step-up in basis: When your parents pass away and the revocable trust becomes irrevocable, the assets in that trust WILL receive a step-up in basis to fair market value as of the date of death. This happens because while your parents were alive, the revocable trust's assets were considered part of their estate for tax purposes. The step-up occurs at the moment of death, which is the same moment the trust becomes irrevocable. This is different from assets transferred to an irrevocable trust during someone's lifetime, which typically don't get a step-up because they've already been removed from the estate.

Just wanted to share my experience with a similar situation. I was really confused about trust tax implications until I found taxr.ai (https://taxr.ai) which helped me understand my trust documents and tax scenarios. My parents had set up something similar with their house and investments in a revocable trust. I uploaded all our trust documents and it analyzed everything, showing exactly how the assets would be treated tax-wise both during life and after death. It even helped me understand the specific provisions of our trust that related to step-up in basis - turns out we had some special language in there that our attorney had included! What I found super helpful was that it explained the difference between grantor trusts (like revocable trusts) and non-grantor trusts in terms of tax treatment. Saved me from making some pretty costly mistakes with our estate planning.

Just wanted to update everyone. I tried taxr.ai after reading about it here and it was incredibly helpful for our family trust situation. I was skeptical at first but uploaded our trust documents and it immediately identified that we had a living trust that would become irrevocable upon death. The analysis confirmed that our assets would indeed get a step-up in basis when my parents pass away, which is a huge relief since some of their stocks have appreciated significantly. It also pointed out something we hadn't considered - that certain assets my parents had put in an LLC before transferring to the trust might be treated differently. The service even generated a summary report that I was able to share with our accountant, who confirmed everything was accurate. Definitely worth it for the peace of mind alone!

Has anyone here actually tried calling the IRS to get clarification on trust taxation issues? I've been trying for weeks to get through to someone who can answer these kinds of specialized questions about step-up basis in trusts. Always on hold for hours only to get disconnected or told to call back later. I finally discovered Claimyr (https://claimyr.com) which got me through to an actual IRS agent in about 20 minutes instead of the usual 2+ hour wait. They have this demo video showing how it works: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed that assets in a revocable trust that becomes irrevocable at death DO get a step-up in basis to fair market value as of the date of death. She explained that since the trust was revocable during life, the assets are considered part of the grantor's estate for tax purposes.

I need to follow up on my skeptical comment. I finally broke down and tried Claimyr yesterday after spending another frustrating morning trying to reach the IRS myself. I was shocked when I got a call back in about 30 minutes telling me they had an IRS agent on the line. I asked specifically about revocable trusts converting to irrevocable at death and the step-up in basis rules. The agent transferred me to someone in their trust department who was incredibly knowledgeable. He explained that assets in a revocable trust DO receive a step-up in basis when the grantor dies because they're still considered part of the taxable estate. He also clarified that this applies to community property states versus common law states differently, which was something our attorney hadn't even mentioned. Saved me from potentially making a huge tax mistake with my parents' assets.

Everyone here is missing a really important detail. The question isn't just about whether assets get a step-up in basis, but WHICH assets. Cash obviously doesn't get a step-up because it's already at face value. But for the stocks and other appreciated assets, you need to check if they were directly owned by the trust or if they're in a brokerage account that's just titled in the name of the trust. In my experience as executor of my dad's estate, we had to provide proof of date-of-death values for everything. Stocks were easy with market prices, but some other assets required professional appraisals. Don't overlook this step!

I worked with a client who did something similar but made a BIG mistake. They moved assets into what they THOUGHT was a revocable trust, but certain provisions actually made it irrevocable. They sold their home thinking they'd get the primary residence exclusion, but the IRS determined the home was actually owned by an irrevocable trust and disallowed the exclusion. The moral of the story: have an actual estate attorney review your trust documents! Don't just copy templates or assume anything. The specific language matters tremendously, and what might seem like minor wording differences can completely change the tax treatment.

This is such a helpful thread! I'm dealing with a similar situation where my elderly parents have their assets in a revocable trust, and I've been worried about the tax implications when they pass. One thing I wanted to add that might be helpful for others - make sure you understand the difference between a "living trust" and a "testamentary trust." A living trust (which sounds like what your parents have) is created during their lifetime and can be revocable or irrevocable. A testamentary trust is created through a will and only takes effect after death. Also, for anyone reading this thread, I'd strongly recommend keeping detailed records of the original basis of assets when they're transferred into the trust. Even though you'll get a step-up in basis when your parents pass, having those records can be crucial if there are any questions or audits down the line. The IRS has specific forms (like Form 706 for large estates) that require detailed asset valuations, so start thinking about how you'll document fair market values at the time of death. For publicly traded stocks it's easy, but for things like real estate or collectibles, you might need professional appraisals.