Do heirs pay capital gains on trust stocks

I recently spoke with Emily, and her situation is unfortunately common. Her mother passed away with a substantial brokerage account held in a revocable living trust. Emily assumed, like many of my clients, that the trust would shield those assets from any immediate tax implications. Instead, she received a hefty tax bill related to the appreciated stock within the trust. It’s a painful lesson, and one I’ve seen play out for over 35 years as both an Estate Planning Attorney and a CPA.

What Happens to Stocks in a Revocable Living Trust?

When someone dies with assets held in a revocable living trust, those assets generally avoid probate. This is a significant benefit, streamlining the transfer of wealth to beneficiaries. However, it doesn’t magically eliminate taxes. The trust assets receive a ‘step-up’ in basis to fair market value as of the date of death. This is where my CPA background becomes incredibly valuable, because many attorneys don’t fully understand the tax ramifications. While the step-up in basis can significantly reduce or eliminate capital gains, it’s not automatic.

How Does the Step-Up in Basis Work?

Let’s say Emily’s mother purchased stock for $50,000 years ago, and it was worth $200,000 on the date of her death. Without the step-up in basis, Emily would owe capital gains tax on the $150,000 appreciation if she sold it immediately. However, because of the step-up, Emily’s cost basis is now $200,000. If she sells the stock for $200,000, there’s no capital gain. If the stock has further appreciated since the date of death, then that increase will be subject to capital gains when she eventually sells it.

When Are Capital Gains Taxes Due?

The step-up in basis doesn’t mean Emily avoids capital gains tax forever. If Emily sells the stock after her mother’s death, she’ll owe capital gains on any appreciation that occurred after the date of death. The tax is due in the year of the sale, and the rate depends on how long the stock was held after the date of death—short-term or long-term capital gains rates apply. This is also why careful valuation as of the date of death is crucial; an accurate appraisal avoids potential IRS scrutiny and ensures you don’t overpay taxes.

What About Inherited IRAs and 401(k)s?

It’s important to distinguish between brokerage accounts (stocks) and retirement accounts. While stocks get a step-up in basis, inherited IRAs and 401(k)s do not. These accounts are subject to income tax when distributions are taken. The rules around ‘stretch’ IRAs have changed significantly, and understanding the implications for your beneficiaries is critical.

How Does Prop 19 Affect Inherited Real Estate and Stocks?

While primarily focused on real estate, Prop 19 can indirectly impact your stock holdings. If you inherit a property and don’t move into it as your primary residence within a year, the property tax base won’t transfer, potentially forcing a sale. This could necessitate liquidating stock to cover the increased property taxes, triggering capital gains. It’s a complex interplay, and proper planning is essential.

What If the Estate is Small?

For very small estates, simplified procedures like the Small Estate Affidavit (for assets under $69,625, primarily real property) or, for deaths on or after April 1, 2025, the ‘Petition for Succession’ under AB 2016 (Probate Code § 13151) may apply, but these usually don’t cover substantial stock portfolios. Remember, the Petition requires a Judge’s Order, unlike an affidavit. Also, to qualify, the decedent’s other assets typically can’t exceed $208,850. If the combined assets exceed that, formal probate is required.

Protecting Your Legacy: The Importance of a CPA-Attorney

As I’ve told countless clients over my 35+ years of practice, estate planning isn’t just about signing documents. It’s about proactively minimizing taxes and ensuring your heirs receive the maximum benefit of your hard work. Having an attorney who is also a CPA allows for a holistic approach, integrating tax strategies into every aspect of your estate plan. Don’t leave this to chance.

Legal & Tax Disclosure: Steve Bliss is an Estate Planning Attorney and CPA in Corona, California. This information is for general guidance only, and does not constitute legal or tax advice. The law is constantly changing, and the information provided may not be current. You should consult with a qualified attorney and CPA before making any decisions about your estate plan. Each situation is unique, and the information provided here may not apply to your specific circumstances.

What standards do California judges use to determine a will’s true meaning?

In California, a last will and testament is reviewed under probate standards that focus on intent, capacity, and execution. Clear drafting reduces ambiguity, limits misinterpretation, and helps families avoid unnecessary conflict during estate administration.

To create a valid document, you must ensure the signer has testamentary capacity, strictly follow will legal requirements, and ensure you are correctly naming the testator to prevent identity disputes.

When a will is drafted with California probate review in mind, it becomes a stabilizing roadmap rather than a source of conflict. Clear intent, proper authority, and compliant execution protect both families and estates.

Resources for Asset Management & Transfer

• Property Tax Reassessment: California State Board of Equalization (Prop 19)
  This page details the “Base Year Value Transfer” rules. It explains that heirs can only avoid a property tax reassessment if the inherited home becomes their primary residence and a claim is filed within one year of the date of death.
• Real Estate Probate (AB 2016): California Probate Code § 13151 (Petition for Succession)
  The specific statute for the AB 2016 process. It outlines the requirements for using a court-approved “Petition” (not an affidavit) to transfer a primary residence worth $750,000 or less (gross value) for deaths occurring after April 1, 2025.
• Small Estate Affidavit: California Probate Code § 13100 (Personal Property)
  Access the statutory language for the “Small Estate Affidavit.” This procedure is strictly for Personal Property (cash, stocks, vehicles) and is limited to estates with a total value of $208,850 or less (effective April 1, 2025).
• Federal Estate Tax: IRS Estate Tax Guidelines
  The authoritative federal resource for estate valuation. It reflects the 2026 exemption increase to $15 million per person established by the One Big Beautiful Bill Act (OBBBA), which is critical for high-net-worth asset planning.
• Unclaimed Assets: California State Controller – Unclaimed Property
  The primary portal for executors and heirs to search for “lost” assets—such as forgotten bank accounts, uncashed dividends, and insurance benefits—that have been remitted to the State of California for safekeeping.
• Business/LLC Compliance: FinCEN – Beneficial Ownership Information (BOI)
  The official portal for corporate transparency reporting. While many domestic U.S. LLCs received exemptions in 2025, executors managing foreign-registered entities or specific non-exempt structures must still consult this resource to ensure compliance.