Yes, a revocable inter vivos trust (commonly referred to as a "living trust") can receive the same step-up in basis as property passing directly to children upon a parent's death, provided certain conditions are met. Here's how it works:

1. Ownership by the Grantor: During the lifetime of the grantor (the person who creates the trust), a revocable trust is considered a "disregarded entity" for tax purposes. This means the grantor is treated as the direct owner of the property, so no change in tax treatment occurs during the grantor's life.

2. Step-Up in Basis at Death: Upon the death of the grantor, the property held in the trust is included in their estate for estate tax purposes. Since the property is part of the taxable estate, it generally qualifies for a step-up (or step-down) in basis to the fair market value as of the grantor's date of death.

3. Distribution to Heirs: When the property is distributed to the beneficiaries (e.g., the grantor's children), they receive the property with the stepped-up basis. This is the same as if they had inherited the property directly outside of the trust.

In summary, the step-up in basis applies to property held in a revocable trust because the property is included in the grantor's estate for tax purposes. This ensures that the beneficiaries, like children, enjoy the same tax benefit as they would if they had inherited the property outright.

To remind you, a step-up or step-down in basis refers to the adjustment of an asset's cost basis (its original purchase price for tax purposes) to its fair market value (FMV) as of a specific date—typically the date of the owner's death.

1. Step-Up in Basis:

   • If the fair market value of the property at the time of the owner's death is higher than the original purchase price (basis), the basis is "stepped up" to the higher FMV.
   • This adjustment can significantly reduce or eliminate capital gains taxes if the beneficiaries sell the property, as the capital gain is calculated based on the difference between the sale price and the new stepped-up basis.

   Example:

   • A parent bought land for $50,000 (original basis).
   • At the time of the parent's death, the land's fair market value is $200,000.
   • The children inherit the property with a basis of $200,000. If they sell it for $200,000, there is no capital gain to tax.

2. Step-Down in Basis:

   • Conversely, if the fair market value of the property at the time of the owner's death is lower than the original purchase price, the basis is "stepped down" to the lower FMV.
   • This prevents the beneficiaries from claiming a loss that never actually occurred during their ownership.

   Example:

   • A parent bought a house for $300,000 (original basis).
   • At the time of the parent's death, the house's fair market value has dropped to $250,000.
   • The beneficiaries inherit the house with a basis of $250,000. If they sell it for $250,000, there is no capital gain or loss to report.

In both cases, the adjustment ensures that the asset's tax basis reflects its value at the time of inheritance, which aligns with the current economic reality