Why a Revocable Living Trust Is the Smartest First Step in Your Estate Plan (and What It Means for Capital Gains)
Meta title: Revocable Living Trust Benefits & Capital Gains | Katie Charleston Law
Meta description: Learn how a revocable living trust can avoid probate, protect privacy, speed up transfers, and affect capital gains (step-up in basis). Schedule a consult with Katie Charleston Law.
When families ask us how to keep loved ones out of court, cut red tape, and transfer wealth cleanly, our go-to answer is a revocable living trust (RLT). It’s the backbone of a modern estate plan—especially for entrepreneurs, real estate owners, blended families, and anyone who values privacy and control. Below, we break down how an RLT works, its top benefits, and how it interacts with capital gains taxes so you can make informed decisions.
What Is a Revocable Living Trust?
A revocable living trust is a legal arrangement you create during your lifetime, naming yourself as trustee (manager) and setting out who receives what, when, and how. Because it’s revocable, you can amend or revoke it anytime while you’re alive and competent. You’ll also name a successor trustee to step in if you become incapacitated or after you pass away.
Key point: An RLT is a will substitute. It doesn’t replace every document (you still need a pour-over will, powers of attorney, and health directives), but it centralizes asset management and distribution.
The Big Benefits
1) Avoid Probate (Save Time, Money, and Stress)
Assets titled in your trust generally bypass probate, the court process that can take months (sometimes over a year), cost thousands, and become a public record. With an RLT, your successor trustee can distribute assets faster and privately.
2) Protect Your Privacy
Probate filings are public. Trust administration is typically private, protecting sensitive information about your family, assets, and business interests.
3) Plan for Incapacity—Not Just Death
If you’re ill or injured, your successor trustee can immediately step in to manage trust assets. That means bills get paid, payroll runs, and investments are handled without a court-ordered guardianship.
4) Reduce Family Conflict with Clear Instructions
Your trust sets out how and when beneficiaries receive assets (e.g., ages or milestones). You can include spendthrift provisions and trustee guidance to limit disputes and protect inheritances from creditors or divorces.
5) Smooth Multi-State Property Transfers
Own real estate in more than one state? Titling those properties into your RLT usually avoids ancillary probate in each state—saving significant time and attorney fees.
Capital Gains 101: How a Revocable Living Trust Affects Taxes
This is where confusion is common. Here’s the plain-English version:
During your lifetime: A standard RLT is a grantor trust for income tax purposes. That means you, personally, report income and capital gains from trust assets on your individual return. Placing assets into your RLT does not itself trigger a capital gains tax.
At death (step-up in basis): Assets in your RLT are generally included in your taxable estate just like assets you own outright. Because of that inclusion, they typically receive a step-up in basis to fair market value as of your date of death.
Why it matters: If your heirs sell soon after, there’s often little or no capital gain to tax.
If the trust holds appreciated stock or real estate, this step-up can translate to substantial tax savings for your beneficiaries.
Post-death sales by the trustee or heirs: After the step-up, any new appreciation is what’s usually subject to capital gains when sold.
Primary residence: If you sell your home while alive, a grantor-type RLT usually preserves your eligibility for the homeowner’s exclusion (IRC §121) if you otherwise qualify.
Important: An RLT is not an income tax shelter and does not, by itself, avoid estate tax. Its power lies in probate avoidance, control, and administration efficiency—with the step-up in basis being a major tax advantage at death.
Will vs. Trust: Which Is Better?
A will alone sends assets through probate. A properly funded RLT avoids it. Most of our clients pair a trust with a pour-over will (to “catch” anything left outside the trust) plus financial and medical powers of attorney. If you want privacy, speed, and a smoother handoff to loved ones, a trust wins.
Funding Your Trust (Don’t Skip This Step)
Creating an RLT is only half the job—funding it is critical. That means:
Retitling real estate, business interests, and non-retirement accounts to the trust
Updating beneficiary designations where appropriate (e.g., life insurance may name the trust or individuals depending on the plan)
Coordinating retirement accounts carefully to avoid unintended taxes and to align with your distribution goals
We provide a funding checklist and hands-on guidance so nothing falls through the cracks.
Who Should Consider an RLT?
Homeowners or anyone with real estate (especially in multiple states)
Business owners and professionals with complex assets
Blended families and parents with young children
Anyone who wants to avoid probate and keep their affairs private
Get a Customized, Tax-Savvy Plan
Every family and business is different. We design revocable living trusts tailored to your assets, state of residence, and legacy goals—and coordinate with your CPA and financial advisor to optimize tax outcomes, including capital gains and step-up in basis planning.
Katie Charleston Law drafts and administers revocable living trusts across multiple jurisdictions and can advise on multi-state strategies.
Ready to protect your legacy and simplify life for your loved ones?
Book a confidential consult today. Call (317) 663-9190 - or contact us online to get started.