How the Wealthy Get a Double Step-Up in Basis

For married couples, a revocable trust can provide an effective framework for avoiding probate and managing how assets pass at death. When a couple owns highly appreciated assets, however, another consideration may be the income tax basis of those assets after the first spouse dies. A community property revocable trust can address this issue by changing how qualifying assets are classified for tax purposes.

Under community property treatment, both spouses’ interests in qualifying assets may receive a basis adjustment at the first spouse’s death, rather than limiting the adjustment to the deceased spouse’s share. This can be particularly important when a surviving spouse needs to sell a residence, rebalance investments, or dispose of a business interest without being constrained by significant embedded capital gains.

Community property treatment exists by default in certain states and may be available by election through a trust structure in jurisdictions such as South Dakota. While this strategy is not appropriate for every couple, it can be a valuable planning tool for families with substantial unrealized gains. Incorporating basis planning into the broader estate planning process can help preserve financial flexibility for the surviving spouse at an important point of transition.