When someone dies with assets held in a trust, the successor trustee steps in to administer them under the document’s terms. For beneficiaries, the practical questions are often immediate: Will assets be distributed outright or remain in trust? Who will manage them? And what tax rules may apply?
What determines whether trust assets receive a step-up in basis?
The first distinction to understand is whether the trust was revocable or irrevocable during the lifetime of the person who created it, known as the grantor.
A revocable trust allows the grantor to retain control of the assets. During life, the grantor can generally amend the trust, change beneficiaries, transfer assets in or out of it, or revoke the trust altogether. At death, however, the trust becomes irrevocable, and the successor trustee assumes responsibility for administering the trust according to its terms.
An irrevocable trust generally cannot be freely revoked or amended by the grantor after it is created. However, the powers a grantor retains, and the ways a trust may later be modified depend on the trust document and applicable law. At death, the trust continues or distributes assets according to its terms.
One important tax question is whether eligible assets receive a basis adjustment at death, commonly called a step-up in basis. The answer is not determined simply by whether a trust is labeled revocable or irrevocable. Assets in a revocable trust are commonly included in the grantor’s estate. Assets in an irrevocable trust may or may not be included, depending on the trust’s terms, retained powers, and other applicable tax rules.
How a step-up in basis works
For eligible inherited property, basis is generally adjusted to fair market value at death. Exceptions and alternate valuation rules can apply.
Example: stock
Purchased for $20,000, worth $120,000 at death
If the stock qualifies for a basis adjustment at death, the beneficiary’s basis would generally become $120,000. A later sale would generally measure capital gain or loss from that adjusted basis rather than the original $20,000 purchase price.
Example: real estate
Purchased for $150,000, worth $650,000 at death
If the property qualifies for a basis adjustment at death, the beneficiary’s basis would generally become $650,000. If the house is later sold for $670,000, the taxable gain would generally be measured from that adjusted basis, subject to applicable tax rules.
What generally qualifies: Many capital assets acquired from a decedent, including stocks, bonds, real estate, and business interests, may qualify for a basis adjustment under federal tax law. Whether a particular asset qualifies depends on how it was owned and transferred at death.
What follows different rules: Some inherited assets do not receive the same basis treatment. Traditional IRAs and pre-tax 401(k) balances generally produce taxable income when distributed rather than receiving a step-up in basis, while inherited Roth accounts can be treated differently. Accrued interest on U.S. savings bonds and taxable amounts from certain annuity contracts may also follow income-in-respect-of-a-decedent rules. For irrevocable trusts, grantor-trust status alone does not create a basis adjustment at death when the assets are outside the deceased grantor’s gross estate. Confirm the treatment of specific assets and trust provisions with a qualified tax professional or estate planning attorney before making distribution decisions.
Will you receive assets outright or through a continuing trust?
Beneficiaries do not always receive their inheritance directly. A trust can distribute assets outright, or it can continue holding and managing those assets after the grantor’s death.
Path one
Assets Distributed Outright
- What you become
- The owner. The assets are yours personally.
- Who manages them
- You do, along with the responsibility that comes with it.
- What happens to the trust
- It may terminate once distribution is complete.
- Tax treatment
- Tax treatment depends on the asset. Any basis adjustment that applied at death generally affects the basis used to measure gain or loss if the asset is later sold.
Path two
Assets remain in a continuing trust
- What you become
- A beneficiary. You have an interest in the trust rather than direct ownership of the trust assets.
- Who manages them
- The trustee, under the terms of the document.
- What happens to the trust
- Some trusts distribute principal in stages at specified ages, while others are designed to hold assets for the beneficiary’s lifetime.
- Access to assets
- Determined by the trust document through a fixed distribution schedule, trustee discretion, or a combination of the two.
The trust document determines which outcome applies. Whether a grantor should choose one path or the other is a separate question, covered in Should you leave your children an inheritance outright or in trust?
What is a testamentary trust?
Not all trusts exist during a person’s lifetime. In some cases, a trust is created through the terms of a will and comes into existence only after the person’s death. This type of trust is known as a testamentary trust.
A testamentary trust can allow assets to remain under the management of a trustee for the benefit of one or more beneficiaries, just like a trust created during the grantor’s lifetime. As a result, you may inherit through a trust even if the person who died never established one while they were alive.
Because a testamentary trust is created under a will, the assets used to fund it generally pass through the deceased person’s estate. Eligible inherited property may receive a basis adjustment at death before being held in the trust. The trust document then governs how and when those assets are managed and distributed to beneficiaries.
Why would a trust continue after death?
When a trust is designed to hold assets long-term rather than distribute them outright, there is usually a specific reason. In many cases, the goal is to provide ongoing financial support while protecting the assets from poor financial decisions, creditor claims, or other risks.
One common way trusts accomplish this is through a discretionary trust. In a discretionary trust, the trustee has broad authority to decide when and how much to distribute based on the beneficiary’s circumstances. Rather than requiring automatic distributions, the trustee can consider factors such as the beneficiary’s financial needs, health, education, and overall situation before releasing funds.
Many discretionary trusts also include a spendthrift provision, a clause that generally prevents beneficiaries from transferring their future trust interests to others. This provision can help protect trust assets from creditors before distributions are made. The extent of these protections depends on applicable state law.
Together, discretionary distribution authority and spendthrift provisions form the foundation of many long-term protective trust structures. They are features within a trust, not separate types of trusts.
What that structure is meant to protect against
- Creditor claims. Depending on the trust’s terms and applicable state law, a properly structured discretionary or spendthrift trust may limit a beneficiary’s creditors from reaching assets before they are distributed. Exceptions can apply.
- Divorce. Whether trust assets are considered in a divorce depends on state law, how the trust was drafted, who funded it, the degree of trustee discretion, and whether a spendthrift provision is included. No trust structure guarantees protection, and outcomes vary by jurisdiction.
- Poor financial decisions. If the document gives the trustee discretion, the trustee can control the timing and amount of distributions, providing another layer of oversight when a beneficiary is struggling to manage money.
- Addiction, illness, or other crises. A trustee with appropriate discretion may be able to delay or adjust distributions based on a beneficiary’s circumstances rather than following an automatic distribution schedule.
A protective trust can address when a beneficiary can access assets, but it does not necessarily prepare that person to manage an inheritance. That separate planning challenge is covered in Preparing your family to inherit wealth.
Specialized trusts for specific goals
| Structure | What It Does | What to Watch |
|---|---|---|
| Lifetime trust | Holds assets for a beneficiary’s lifetime rather than distributing everything at a set age. Remaining assets pass to the next generation under the grantor’s instructions. | Often used to preserve family wealth across multiple generations, which means the terms have to work for people not yet born. |
| Incentive trust | Links distributions to specific behaviors or achievements, such as completing a degree, maintaining employment, or reaching defined milestones. | Life circumstances change. These require careful drafting to avoid penalizing a beneficiary for something nobody anticipated. |
| Special needs trust | Also called a supplemental needs trust. Can provide supplemental support for a beneficiary with a disability while helping preserve eligibility for means-tested benefits such as SSI or Medicaid when the trust meets applicable requirements. | Rules vary by trust type and benefit program. Drafting or administration mistakes can affect eligibility, so these trusts require specialized legal guidance. |
| Marital and bypass trusts | After one spouse dies, an estate plan may direct assets to a marital trust, a bypass or credit shelter trust, or both. These structures can address support for the surviving spouse, control over remaining assets, and estate tax planning. | Federal and state estate tax rules differ, and Massachusetts has its own estate tax rules. These structures should be designed and reviewed with an estate planning attorney and appropriate tax professionals. |
What does the successor trustee do after death?
Regardless of the trust’s structure, the successor trustee assumes responsibility for administering the trust after the grantor’s death. Common responsibilities include:
- Obtaining death certificates and completing required administrative tasks
- Communicating with beneficiaries and providing any required notices
- Identifying, valuing, and safeguarding trust assets
- Paying valid debts, taxes, and administrative expenses
- Filing required trust tax returns and handling ongoing tax matters
- Distributing assets or continuing to manage them according to the trust’s terms
The successor trustee has fiduciary responsibilities under the trust document and applicable law. Those responsibilities generally include administering the trust according to its terms, safeguarding trust property, keeping appropriate records, and acting in the interests of the beneficiaries. Because the role can involve significant legal and administrative responsibilities, some grantors appoint a professional or corporate trustee, particularly for long-term or complex trusts.
Digital assets can create a separate access problem. Legal authority does not necessarily provide practical access to cryptocurrency or other digital assets. Self-custodied assets may be difficult or impossible to recover if private keys or other access information cannot be located, while custodial accounts may have their own estate and account-recovery procedures. See Crypto and your estate plan.
Frequently Asked Questions
What happens to a revocable trust when the grantor dies?
A revocable trust becomes irrevocable at the grantor’s death. The successor trustee named in the document takes over, and assets are either distributed to beneficiaries or held in a continuing trust, depending on how the trust was drafted.
Do you pay taxes on money inherited from a trust?
Not necessarily. Tax treatment depends on the type of asset, whether it received a basis adjustment at death, and whether a distribution carries taxable trust income to the beneficiary. Receiving trust principal is not automatically taxable simply because it is inherited. Because trust taxation depends heavily on the assets and how distributions are made, a qualified tax professional should review the specific circumstances.
Does a trust avoid probate?
Assets held in a properly funded revocable trust at the time of death generally avoid probate. Assets that were not transferred into the trust may still be subject to probate, depending on state law and how ownership was structured.
Can creditors go after a trust after someone dies?
It depends on the trust’s terms and applicable state law. For trusts with valid spendthrift provisions, a beneficiary’s creditors generally cannot reach trust assets before distributions are made. However, creditors of the deceased person may still have claims in certain circumstances. Because these rules vary by state and trust structure, legal guidance is often necessary.
How long can a trust remain open after death?
There is no fixed rule. A trust may distribute and close within months, or it may remain open for decades, depending on its terms and purpose.
How trust design changes the outcome
Two trusts holding similar assets can produce very different outcomes for beneficiaries. Distribution rules, trustee discretion, beneficiary protections, tax treatment, and the powers retained by the person who created the trust can all affect what happens after death.
That is why understanding the trust document matters as much as understanding the assets inside it. The document determines who controls those assets, when beneficiaries can receive them, and what restrictions may continue after the grantor’s death.
Coordinating a trust with the rest of your financial plan
A trust does not operate in isolation. Account titling, beneficiary designations, investments, estate tax considerations, and the terms of other estate documents can all affect whether the overall plan works as intended.
Finivi helps clients coordinate estate planning considerations with investment management and broader wealth management, working alongside estate planning attorneys and tax professionals as appropriate.
Do you know how your trust fits into your financial plan?
If you already have a trust, understanding how its terms interact with your accounts, beneficiary designations, investments, and broader estate plan can help identify questions worth addressing with your advisory team.
This article is provided for informational and educational purposes only and does not constitute legal, tax, or investment advice. The content is intended to offer general guidance on trust structures and estate planning concepts, and may not address your individual circumstances. No attorney-client, accountant-client, or advisory relationship is created by reading or relying on this content. Individuals should consult independent, licensed legal, tax, and financial professionals before making any decisions based on this material. While every effort is made to ensure accuracy, no guarantee of completeness is provided, and no liability is accepted for reliance on this content. Finivi Inc. is a Registered Investment Adviser. This material does not represent an offer, solicitation, or recommendation for any specific financial product or service.
