With the recent increase of the 2026 federal estate and gift tax exemption to an unprecedented and astounding $15 million per person (a whopping $30 million for married couples), the necessity of federal estate tax planning is on the decline. With less than one percent of the population currently subject to estate taxes, individuals looking to achieve a tax-efficient transfer of wealth to future generations are advised to consider alternate methods of tax savings.
One useful tax-saving tool is the step up in basis. A step up in basis is an adjustment of the value of an inherited asset to its fair market value at the date of the original owner’s death. This adjustment often significantly decreases, or even eliminates, the capital gains tax that a beneficiary would owe should the beneficiary choose to sell the inherited asset. Assets that are included in a decedent’s estate are generally eligible for a basis step-up. This includes assets held in a trust, so long as the trust is otherwise included in the grantor’s estate.
Married couples have an additional basis planning mechanism at their disposal — the “double basis step up,” which occurs when assets receive a basis adjustment upon each spouse’s death. One way a married couple can achieve a double basis step-up is with a QTIP trust. Under this mechanism, one spouse (the transferor) transfers assets to a revocable trust and uses the trust income to benefit both spouses during the transferor’s lifetime. The trust is included in the transferor’s estate because it is revocable, meaning the trust assets will receive a first basis step up upon the transferor’s death. Thereafter, the assets remain in trust for the surviving spouse’s benefit. The executor for transferor’s estate makes a “QTIP” election on transferor’s federal estate tax return, thereby causing the trust assets to be included in the surviving spouse’s estate at death, causing the assets to receive a second basis step-up upon surviving spouse’s death.
Individuals who created trusts many years ago — before the unprecedented rise of the federal estate and gift tax exemption — likely utilized planning techniques aimed at minimizing federal estate taxes, which techniques may have ignored basis step-up considerations. However, given the current federal tax environment, the capital gains tax savings occasioned by an estate plan focused on a (double) basis step-up may well outweigh tax savings resulting from an estate plan focused on estate tax minimization.
