09 Aug What happens to a house in an irrevocable trust?

Q. My father passed away. His house is in an irrevocable trust with my brother and I as co-trustees. I was told to get it appraised now and when it is sold, the difference would be the step-up for taxes. What is going to happen to trust with regards to capital gains from when he bought the house? Will it be taxed?
— Confused

A. We’re sorry to hear about your dad.

There are several things to know about your situation.

Property which is in a trust — whether revocable or irrevocable — is a non-probate asset, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

This means that upon death, the property passes in accordance with the terms of the trust and not a decedent’s will, she said.

Other types of non-probate assets include assets which a decedent owns jointly with another person — such as joint real estate, joint bank accounts, etc. — as well as assets which designate a beneficiary, such as payable on death (POD) accounts, life insurance and retirement assets, she said.

Romania said both probate and non-probate assets may be considered part of the decedent’s federal taxable estate.

“If the assets are included in the decedent’s taxable estate, notwithstanding no tax is paid because the total estate is below the federal estate tax exemption, then the basis in the assets obtains a step-up to the date of death value,” Romania said. “The step-up in basis is beneficial to the beneficiaries because when they sell the property, they will not have to pay income tax on the difference between the decedent’s basis and its value at date of death.”

Irrevocable trusts may or may not be included in a decedent’s taxable estate, Romania said.

In order to obtain the step-up in basis and the income tax advantage to the beneficiaries, there must be inclusion.

“Inclusion may be possible because the decedent had a general power of appointment such that decedent, decedent’s estate or creditors could be named beneficiaries by the decedent,” she said. “Another possibility is that decedent was the creator of the trust and retained certain rights.”

If the trust is not included in the decedent’s estate, and if the decedent gifted the house to the trust, then the trust — and thus the beneficiaries — take the house with the decedent’s basis and do not benefit from the step-up, Romania said. Therefore, capital gains will likely be incurred on the difference, she said.

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This story was originally published in August 2026. 

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.