07 Sep The $15 Million Question: Do You Still Need Estate Tax Planning, or Do You Need Basis?
A client called me last year with a problem he didn’t know he had. In 2016, his estate planning attorney built exactly what the textbook said to build: an irrevocable grantor trust, funded with his commercial real estate portfolio. At the time, the federal estate tax exemption was $5.45 million. His portfolio was worth $8 million. The math was obvious. Move it out of his estate, save his family roughly $1 million in estate tax.
Ten years later, the exemption is roughly $15 million per person, $30 million for a married couple. His estate, even with the growth, sits well under the line. He doesn’t have an estate tax problem anymore. But he does have a basis problem. And it’s bigger than the estate tax bill he was trying to avoid.
The Trade You Made
When you move assets into an irrevocable trust, you’re making a trade: you give up estate tax exposure in exchange for giving up the step-up in basis at death. Under Section 1014 of the Internal Revenue Code, assets included in your taxable estate get their cost basis reset to fair market value when you die. Your heirs sell the property, and the capital gains tax on decades of appreciation disappears.
But assets in an irrevocable trust that isn’t included in your estate don’t get that reset. The trust keeps your original basis. When your children eventually sell, they pay capital gains tax on every dollar of appreciation from the day you bought the property.
In 2016, if your estate was above $5.45 million, that trade made sense. Estate tax runs at 40%. Long-term capital gains top out at 23.8% (20% federal plus the 3.8% net investment income tax). Paying 23.8% later to avoid 40% now was a good deal. For a deeper look at the differences between these trust types, see Trusts: Revocable vs. Irrevocable.
The Math Flipped
The Tax Cuts and Jobs Act of 2017 doubled the exemption. The One Big Beautiful Bill Act of 2025 made the higher number permanent. Today, a married couple can pass roughly $30 million to their heirs without a dollar of federal estate tax.
If your estate is under that number, the trade you made in 2016 now runs in reverse. You gave up the step-up for nothing. Your family will pay capital gains tax on appreciation that would have been wiped clean if you’d simply kept the property in your own name, or in a revocable trust, and let it pass through your estate at death.
Here’s what that looks like with real numbers. Say you bought a commercial building in 1998 for $1.2 million. It’s worth $4.5 million today. If it’s in your estate when you die, your heirs get a $4.5 million basis. They sell it, they owe zero capital gains tax on the $3.3 million of appreciation. If it’s in the irrevocable trust you funded in 2016, your heirs keep your $1.2 million basis. They sell it, they owe roughly $785,000 in federal capital gains tax. That’s the cost of a structure that, at today’s exemption levels, isn’t saving them anything on the estate tax side.
Rev. Rul. 2023-2 Made It Worse
For years, some estate planners assumed that assets in an irrevocable grantor trust would still get a basis step-up at the grantor’s death, because the grantor was treated as the owner for income tax purposes. The IRS put that argument to rest in Revenue Ruling 2023-2. The ruling is direct: if the trust assets aren’t included in the grantor’s gross estate under Sections 2036 through 2042, they don’t qualify for a step-up under Section 1014. It doesn’t matter that the grantor paid the trust’s income taxes for 20 years. No estate inclusion, no step-up.
This hits hardest for families with commercial real estate, closely held business interests, and other low-basis, high-appreciation assets sitting inside irrevocable grantor trusts. The whole income tax strategy of the grantor trust, which I explain in more detail in Why the Wealthiest Families Pay Their Trust’s Income Tax on Purpose, still works for families above the exemption. For families below it, the income tax benefit doesn’t come close to offsetting the lost step-up.
What Can You Do About It?
The good news: for most families, the structure can be adjusted. Not unwound exactly, but redirected. The specific fix depends on how the trust was drafted and what powers were reserved or granted.
One practical fix: if the trust is a grantor trust and the trust instrument includes a substitution power under Section 675(4)(C), the grantor can swap low-basis, high-appreciation assets out of the trust in exchange for cash or high-basis assets of equal value. The swap isn’t a taxable event (the grantor and the trust are the same taxpayer for income tax purposes). The low-basis asset goes back into the grantor’s estate, where it will get a step-up at death. The cash or high-basis asset stays in the trust. Not every grantor trust includes this power, but if yours doesn’t, it may be possible to add one through decanting into a new trust with updated terms, depending on your state’s law and the trust’s existing provisions.
The Question to Ask Your Attorney
Pull out your estate plan and ask one question: at today’s exemption levels, is my family better off with these assets inside the trust or outside it? If the estate tax savings is zero because you’re under the exemption, and the capital gains cost is six or seven figures because the basis is frozen, it’s worth taking a hard look at your options.
The planning that was right in 2016 isn’t automatically right in 2026. The exemption changed. The IRS clarified the step-up rules. The math moved. The plan should move with it.
Not Sure Whether Your Trust Structure Still Fits?
For advisors: Have a client dealing with this? I do quick consult calls for advisors working through complex planning situations.
Schedule a call: https://lgarzalaw.com/schedule-online/
For business owners and families: At Garza Law, we are selective in choosing our clientele. We work with a select group of families every year to help them protect their legacy. If what you read here raised questions about your own situation, you can apply here:
Related Reading
Trusts: Revocable vs. Irrevocable. The fundamental distinction behind every trust-based estate plan.
Why the Wealthiest Families Pay Their Trust’s Income Tax on Purpose. How grantor trust status works, and when the income tax strategy makes sense.