ARID Partners | Estate Planning | April 2026
For decades, one of the most powerful tools in estate planning was the step-up in basis. The concept is straightforward: when heirs inherit an asset, its cost basis resets to the fair market value at the time of death, effectively wiping out a lifetime of accumulated capital gains. For a property purchased in 1987 for $200,000 now worth $2 million, that step-up can mean the difference between a clean transfer of wealth and a significant, unexpected tax bill.
Many property owners structured irrevocable trusts specifically to take advantage of this provision. In March 2023, the IRS issued guidance that every trust holder should know about.
What the IRS Clarified
Revenue Ruling 2023-2, issued March 30, 2023, confirmed that assets held in an irrevocable grantor trust do not receive a step-up in basis at the grantor’s death, unless those assets are included in the grantor’s taxable estate. While some have described this as a new rule, it is more accurate to call it a formal clarification of existing tax law. The practical consequence for property owners is the same either way: assets moved into these structures to avoid estate taxes may now pass to heirs at the original purchase price, not current market value.
The tradeoff at the center of this issue has always existed. Moving assets out of your taxable estate reduces potential estate tax exposure, and giving up the step-up in basis increases potential capital gains exposure for heirs. Revenue Ruling 2023-2 reinforces exactly how that tradeoff applies to irrevocable grantor trust structures. For Arizona property owners with significant unrealized appreciation, the downstream tax exposure for heirs can be substantial.
There is a second development that makes this even more pressing. Most irrevocable trusts were created when the federal estate tax exemption sat around $5.49 million per individual. The One Big Beautiful Bill Act of 2025 permanently raised the estate tax exemption 2025 threshold to $15,000,000 per individual and $30,000,000 for a married couple, indexed for inflation going forward. Arizona levies no state estate tax.
For many families, the trust was built to solve an estate tax problem that no longer exists at their asset level. The result is a structure that blocks the step-up in basis without providing the estate tax protection it was designed for. The trust has become a liability, not a shield.
What It Costs in Real Dollars
To understand what is at stake, consider an industrial property purchased in 1998 for $1,357,000. Today that property is worth $4,000,000. After 28 years of ownership, the adjusted tax basis has been reduced to $368,444 by accumulated depreciation. If the heirs inherit that property through an irrevocable trust with no step-up in basis and sell it, the tax burden looks like this:
| Tax | Amount |
|---|---|
| Federal Capital Gains (15%) | $354,450 |
| Net Investment Income Tax (3.8%) | $127,359 |
| Depreciation Recapture (25%) | $247,139 |
| Arizona State Tax (2.5%) | $83,789 |
| Total Tax Burden | $812,737 |
That $812,737 does not come due at the moment of inheritance. The heirs owe nothing until they sell. What the trust structure does is eliminate the one mechanism that would have erased that liability entirely: the step-up in basis.
The liability is already embedded in the property today, sitting in the gap between the adjusted basis and the current market value. It does not require a sale at a higher price or any future appreciation. Every year the property appreciates further, the number grows.
A step-up in basis, available to any estate below the $15,000,000 exemption threshold, eliminates that entire figure. The cost to restructure is the attorney and CPA fees to execute the change correctly. The cost of doing nothing is $812,737, and it compounds.
What This Does Not Mean
This ruling does not mean all irrevocable trusts lose the step-up in basis. If a trust is structured so that assets are included in the grantor’s taxable estate at death, the step-up still applies. It also does not mean irrevocable trusts are no longer effective planning tools. They remain powerful instruments in the right circumstances. What it does mean is that the details of how a trust is structured matter more than ever, and a structure that made sense when the estate tax exemption was $5 million may not serve the same purpose today.
What It Does Not Affect
This ruling applies specifically to irrevocable grantor trusts where assets are removed from the taxable estate. Revocable living trusts are not affected. Assets in those structures continue to receive the step-up in basis as they always have.
What to Do Now
If you established an irrevocable trust prior to 2023, or if you have not had an estate planning review since the ruling came out, now is the time. The options vary depending on how the trust is structured, what assets are held, and the grantor’s current tax situation. There is no universal fix, but there are paths forward, and the right estate planning attorney can identify which one applies to your situation.
Why This Matters to ARID
At ARID, we work with long-term property owners who have spent decades building something worth protecting. The step-up in basis is one piece of a larger picture, and it is a good reminder that how you hold your assets matters as much as what you have built.
For owners who want to step back from active management without stepping away from the asset, ARID structures partnerships that make that possible. You stop being the landlord. ARID handles operations. You maintain real estate exposure, preserve the income stream, and keep the wealth you have built intact for the people who come after you, without a forced sale and without triggering a capital gains event to get there.
If you have spent years accumulating real estate, let us show you what a partnership structure could look like.
We work with long-term industrial property owners across Arizona who want to protect what they have built and pass it on without the tax bill. We are happy to have that conversation.
Visit aridpartners.comThis article is for informational purposes only and does not constitute legal or tax advice. Figures used are for illustrative purposes only and are based on specific assumptions including filing status, applicable tax rates, and property basis at time of calculation. Consult a qualified estate planning attorney and tax advisor regarding your specific situation.
