A Section 1015 Trust is a strategic estate planning tool used to transfer wealth outside of an individual’s taxable estate. Unlike a Section 1014 Trust, which allows assets to receive a step-up in basis at death, a Section 1015 Trust does not—meaning heirs inherit the original cost basis of the assets.
While the lack of a step-up in basis is a drawback, the Section 1015 Trust provides significant advantages in terms of discounting, gifting over time, self-canceling installment note (SCIN) transactions, and family limited partnerships (FLPs). Here’s how this trust works, when to use it, and why it remains a valuable tool despite its basis limitations.
What Is a Section 1015 Trust?
The name "Section 1015 Trust" comes from IRC §1015, which governs the carryover basis of gifted assets. When assets are transferred into an irrevocable trust during the grantor’s lifetime, they are removed from the estate and do not receive a basis step-up upon the grantor’s death. Instead, the assets retain their original (carryover) basis, plus any gift tax paid.
This means that if a parent gifts an investment property purchased for $500,000 (its original basis) into a Section 1015 Trust and it grows to $2 million by the time the beneficiary sells it, the beneficiary will owe capital gains taxes on the $1.5 million gain rather than just gains above the fair market value at inheritance.
You would do this to reduce estate taxes, which are substantial (40% Federal, states vary) and apply to the entire value, not just the gain. Frequently the estate tax bill would be larger than the income tax bill and you may choose the lesser of two evils.
It is beyond the scope of this post, but often times the two types of trusts are used together to optimize the best of both worlds.
Key Benefits of a Section 1015 Trust
1. Removing Assets from the Taxable Estate
Assets placed into a Section 1015 Trust are removed from the grantor’s estate, meaning they do not count toward the amount of the estate tax (and the exemption) at death.
This is particularly beneficial for high-net-worth individuals looking to reduce their taxable estate and avoid the potential 40% estate tax (plus state) on amounts exceeding the exemption threshold.
2. Discounting for Gift Tax Purposes
Many estate planners use valuation discounts (such as lack of marketability and minority interest discounts) when transferring assets into a Section 1015 Trust.
If structured properly, assets gifted into the trust can be valued at 20-40% less than their actual fair market value, reducing the taxable value of the gift.
3. Gifting Over Time and Leveraging the Annual Gift Tax Exclusion
The Section 1015 Trust allows for gradual wealth transfer through annual exclusion gifts ($19,000 in 2025).
This strategy helps move wealth out of the estate without triggering gift tax liabilities or using up the lifetime estate and gift tax exemption ($13.99 million in 2025).
4. Using a Self-Canceling Installment Note (SCIN)
A SCIN transfer allows a grantor to sell assets to a Section 1015 Trust in exchange for a promissory note with payments structured over time.
If the grantor dies before the note is fully repaid, the remaining balance is canceled—effectively removing a portion of the asset’s value from the estate tax-free.
This is especially powerful for individuals with health concerns who anticipate a shorter life expectancy, as the IRS allows actuarial adjustments to the note’s structure.
5. Family Limited Partnerships (FLPs) and the 1015 Trust
A Family Limited Partnership (FLP) can be used in conjunction with a Section 1015 Trust to further discount the value of gifted assets.
The FLP holds investments or real estate, and limited partnership interests are transferred into the trust at discounted valuations.
These have been looked upon unfavorably by the IRS in recent years.
The Major Drawback: No Step-Up in Basis
The biggest downside of a Section 1015 Trust is that assets do not receive a step-up in basis at death.
Why Is This a Concern?
If an asset appreciates significantly, beneficiaries may face large capital gains taxes when they sell it.
The difference between the original purchase price (carryover basis) and the sale price is taxed as a capital gain, which can be as high as 20% federally (plus state taxes) plus the NIIT.
This is in contrast to a Section 1014 Trust, where assets receive a step-up to fair market value, eliminating capital gains taxes upon inheritance.
Mitigating the Basis Issue
While the lack of a step-up in basis is a downside, there are ways to minimize its impact:
Selling high-based assets first: Beneficiaries can strategically sell assets with little or no capital gains.
Holding assets long-term: Keeping assets inside the trust allows for continued tax-deferred appreciation without immediate tax consequences.
Charitable Remainder Trusts (CRTs): If heirs don’t need the assets, placing them into a CRT upon sale can provide tax-free growth and structured income payments.
When to Use a Section 1015 Trust
A Section 1015 Trust is ideal for individuals who are expected to be OVER the Federal Exemption
Have assets that are expected to appreciate significantly and want to remove them from their estate
Want to utilize valuation discounts to gift assets at a lower tax cost
Are looking to gift assets over time using annual exclusions
Have a longer-term estate plan and are less concerned about immediate capital gains tax exposure
Never use these trusts if you can use the exemption and get a basis step up. Place your lower basis assets in the 1014 trust if liquidity is a priority. Understanding the Section 1015 Trust: Assets Not Included in the Taxable Estate.
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