Do heirs pay capital gains on trust stocks

I recently had a client, Emily, come to me in a complete panic. Her mother had passed away with a sizable portfolio of stocks held in a revocable living trust. Emily’s mother’s estate plan seemed solid, but Emily hadn’t realized the potential capital gains tax implications when she inherited the assets. She’d assumed the trust protected her from all taxes, which, unfortunately, isn’t the case. She was facing a six-figure tax bill she hadn’t anticipated and was scrambling to find a solution – a costly and stressful situation we’ve thankfully been able to mitigate, but one that’s entirely preventable with proper planning.

The issue boils down to something called “step-up in basis.” When an asset like stock is inherited, it receives a new “basis” equal to its fair market value on the date of the decedent’s death. This means the heir doesn’t pay capital gains tax on the appreciation that occurred before inheritance. However, any appreciation occurring after the date of death, before the stock is sold, is taxable. As a CPA as well as an estate planning attorney with over 35 years of experience, I always emphasize this crucial point.

For example, if Emily’s mother purchased stock for $50,000, and it was worth $100,000 on the date of her death, Emily’s basis becomes $100,000. If she sells the stock immediately for $110,000, she’ll only pay capital gains tax on the $10,000 gain. But if she holds it longer, and it increases to $120,000, the taxable gain jumps to $20,000. Careful timing and valuation are therefore critical.

What if the trust doesn’t specify a valuation date?

This is where things can get tricky. If the trust document doesn’t clearly define the valuation date – typically the date of death – the IRS may challenge it, potentially leading to a lower basis and increased tax liability. A properly drafted trust will specify the valuation date and even include language outlining a qualified appraiser for more complex assets. This is especially important if the trust holds closely-held business interests or real estate.

As the executor of the trust, you have a fiduciary duty to manage the assets responsibly, which includes obtaining accurate valuations and minimizing tax burdens for the beneficiaries. Failure to do so could expose you to personal liability. Furthermore, if the trust includes a discretionary distribution clause – meaning the trustee has the power to decide when and to whom assets are distributed – it can complicate the valuation process and trigger additional scrutiny from the IRS.

How does this apply to real estate held in the trust?

The rules regarding capital gains on inherited real estate are similar, but with some key differences. As of April 1, 2025, California’s AB 2016 allows a ‘Petition for Succession’ for a primary residence valued up to $750,000. This can simplify the transfer process, but it does not automatically eliminate capital gains taxes. It’s also important to remember that this Petition requires a Judge’s Order, it is not an Affidavit like the Small Estate Affidavit (for real property under $69,625). Also, to qualify, the decedent’s other probate assets must remain below the $208,850 limit.

Further, under Prop 19, heirs can only keep a parent’s low property tax base if they move into the home as their primary residence within one year and the home’s value is within specific limits. Ignoring these nuances can lead to significant tax penalties.

What about digital assets and LLCs?

Don’t forget about digital assets! Without specific RUFADAA language (Probate Code § 870) in your Trust or Will, service providers like Coinbase and Google can legally deny your executor access to your digital assets. And if the trust holds an LLC, be aware of the FinCEN 2025 Exemption: as of March 2025, domestic U.S. LLCs are exempt from mandatory BOI reporting under the Corporate Transparency Act; however, executors managing foreign-registered entities must still file updates within 30 days to avoid fines of $500/day. Properly addressing these often-overlooked assets is critical for a smooth estate administration.

• Step-Up in Basis Explained: Inherited assets receive a new basis equal to their fair market value on the date of death.
• Valuation Date Importance: Clearly define the valuation date in your trust document.
• AB 2016 & Primary Residences: Know the requirements for petitioning for succession of real estate.
• RUFADAA & Digital Assets: Include appropriate language to ensure access to digital assets.
• FinCEN 2025 Exemption & LLCs: Understand the BOI reporting requirements for LLCs.

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

In California, a last will and testament operates within a probate system that emphasizes intent, clarity, and procedural compliance. When properly drafted, a will does more than distribute property—it creates legally enforceable instructions that guide courts, fiduciaries, and beneficiaries through administration with fewer disputes and less uncertainty.

• Planning: Review estate planning regularly.
• Validation: Check legal requirements.
• Parties: Update personal information.

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.