What is the tax consequence for trust assets upon the death of the grantor of a revocable trust?

Upon the death of the grantor of a revocable trust, the assets held within that trust typically receive a step-up in basis to their fair market value at the date of the grantor's death. This adjustment in basis reflects a recognition that the assets are now part of the grantor’s estate and therefore subject to estate tax regulations.

The correct understanding is that the assets are included in the grantor's taxable estate, which may be subject to estate taxation depending on the total value and the tax laws applicable at that time. The step-up in basis means that if the beneficiaries decide to sell the assets after the grantor's death, they would not incur capital gains tax on appreciation that occurred during the grantor's life, as the basis for taxation is reset to the fair market value on the date of death.

This outcome helps to minimize the tax burden on beneficiaries during the transfer of wealth and ensures that the trust assets are managed in a way that aligns with the tax implications of the estate tax system. Understanding the relationship between revocable trusts and estate taxes is crucial for effective estate planning.