Trusts, Probate, and Stepped-Up Basis
Reviewed by Guillermo Serafin, Responsible Broker, DRE #01471159 · Serve First Realty Inc., DRE# 02133513 · Updated July 22, 2026
Two concepts do more than any others to determine how smoothly, and how tax-efficiently, property passes from one generation to the next in California: whether the property is held in a trust, and the stepped-up basis at death. Understanding both helps you plan your own estate and make sense of one you inherit. Here is how they work.
Trust versus probate
When someone dies, their property either goes through probate, the court-supervised settlement process, or passes outside it. The main tool for avoiding probate is a living trust. You create the trust during your life, transfer your assets into it (this is called funding the trust), and name who receives them. When you die, the successor trustee distributes the assets according to the trust, with no court involvement, no public process, and typically far less time and cost than probate.
A will, by contrast, does not avoid probate; it simply directs how the court should distribute assets that go through probate. This surprises many people. The common estate planning advice to set up a trust is largely about sparing your heirs the delay and expense of probate. The catch is that a trust only works for assets actually transferred into it; a home left out of the trust can still end up in probate. Our trust administration cluster covers managing a trust after a death.
The stepped-up basis
The stepped-up basis is one of the most valuable provisions in the tax code for families. Normally, when you sell property, you owe capital gains tax on the difference between the sale price and your cost basis, what you paid plus improvements. But when you inherit property, the basis is stepped up to the fair market value at the date of death.
Consider a parent who bought a home decades ago for 150,000 dollars that is now worth 900,000 dollars. If they sold it during life, they would face capital gains tax on roughly 750,000 dollars of appreciation. But if a child inherits it, the basis steps up to 900,000 dollars. If the child then sells for 900,000 dollars, there is essentially no taxable gain. Decades of appreciation vanish for tax purposes. This is why inheriting and then selling is so tax-efficient, and why some families choose to hold appreciated property until death rather than selling during life.
The Proposition 19 wrinkle
Stepped-up basis affects income tax on a sale. Proposition 19 affects a different tax: the annual property tax. Even with a favorable stepped-up basis for capital gains, an inherited home may be reassessed to current market value for property-tax purposes under Prop 19, unless the child moves in as a primary residence within a year and the value falls within the cap. So an heir can enjoy a stepped-up basis for capital gains yet still face a much higher annual property-tax bill. Our Prop 19 guide explains this in detail.
What this means for planning
For your own estate, a properly funded living trust spares your heirs probate, and holding appreciated property until death passes it with a stepped-up basis. For property you inherit, the step-up makes selling soon after tax-efficient, while the Prop 19 rules shape whether keeping it makes sense. These are significant decisions with real dollars attached. This is general information, not legal or tax advice; consult a qualified attorney or CPA about your situation. Serve First Realty helps with the real estate decisions, and Ashlar LDA can prepare many trust and transfer documents at your direction.
Frequently asked questions
What is the difference between a trust and a will?
A living trust lets your assets pass to your beneficiaries outside of probate, through a successor trustee, privately and usually faster and cheaper. A will does not avoid probate; it only directs how the court should distribute assets that go through the probate process. This is why a trust is the main tool for avoiding probate, while a will alone still leaves assets subject to it.
How does a stepped-up basis work?
When you inherit property, its cost basis for tax purposes is reset, or stepped up, to its fair market value at the date of death, rather than what the original owner paid. If you then sell near that value, your taxable capital gain is minimal because decades of the original owner's appreciation are erased for tax purposes. This makes inheriting and selling far more tax-efficient than receiving the property as a gift during life.
Does a living trust avoid capital gains tax?
A living trust's main benefit is avoiding probate, not capital gains tax. However, property passing through a trust at death still receives the stepped-up basis, just as it would through probate, so the capital gains benefit applies either way. The trust's value is in sparing your heirs the time, cost, and public process of probate, while the step-up handles the capital gains side.
Do I get a stepped-up basis and avoid property tax reassessment?
These are two separate taxes. The stepped-up basis reduces capital gains tax when you sell. Property-tax reassessment is governed by Proposition 19, and an inherited home can still be reassessed to market value for annual property taxes unless you move in as a primary residence within a year and the value is within the cap. So you can get the step-up for capital gains yet still face higher property taxes.
Why do some families hold property until death instead of selling?
Because of the stepped-up basis. If a parent sells a long-held, highly appreciated property during life, they owe capital gains tax on decades of appreciation. If they instead hold it until death, their heirs receive it with a basis stepped up to current market value, which can eliminate that capital gains tax entirely. This is a common reason families hold appreciated real estate rather than selling.
Questions about your specific situation?
Serve First Realty and the Ashlar Brands family can help you plan a move, sale, or investment around the tax rules that apply to you. This article is educational, not tax advice.
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