Concentrated Stock in a Trust: What the Trustee Must Know

Your parent's trust holds 80% of its value in Apple stock, or employer shares accumulated over a 35-year career. You are now the successor trustee. You have a fiduciary duty to diversify — and a tax code that makes selling inside the trust expensive. Here is how to think through both obligations, and where the step-up in basis at death changes the analysis in ways most trustees don't realize.

The UPIA diversification duty — and why it matters to you personally

The Uniform Prudent Investor Act (UPIA) governs how trustees manage trust assets in all 50 states.¹ Section 3 states that a trustee should diversify the investments of the trust unless, under the circumstances, it is prudent not to diversify.

This is not a suggestion. A trustee who holds a concentrated position without documented justification is potentially liable for the losses if the stock drops. Beneficiaries — particularly remainder beneficiaries — can file a surcharge action seeking to recover from the trustee personally for losses attributable to an undiversified portfolio.²

UPIA § 3 does not require immediate, unconditional selling. It requires the trustee to consider diversification and act within a reasonable time. What it prohibits is inaction by default — simply leaving the portfolio the way you found it because it's easier than dealing with it. That default inaction, if challenged, puts the burden on the trustee to explain why concentration was prudent given the full picture.

Step-up in basis: the tax argument for holding usually disappears at death

The most common reason individuals hold concentrated positions is the embedded capital gain — selling means a large tax bill. That argument usually does not survive the settlor's death.

Under IRC § 1014, assets held in a revocable living trust at the decedent's death receive a stepped-up cost basis equal to fair market value on the date of death.³ If the settlor held 10,000 shares of Apple with an average cost of $12/share, and the shares are worth $200 on the date of death, the trust's new basis is $200/share — not $12. Decades of embedded gain are gone.

This means if the trust sells those shares shortly after death, the capital gain is approximately zero. The tax argument that made concentration rational for the settlor during life — "I can't sell, I'd owe too much in taxes" — no longer applies to the trustee. You are holding stock with a near-zero cost basis, and the UPIA duty to diversify applies with full force.

The holding period is automatically long-term

Under IRC § 1223(11), inherited property is treated as held long-term regardless of the actual holding period after death.⁴ The trust can sell on day two and pay long-term capital gains rates — not short-term ordinary income rates. This matters because short-term rates can be 37% for a trust; long-term rates cap out at 20% plus NIIT.

The trust capital gains tax trap — the real tax problem after the step-up window closes

The step-up eliminates historical gain. But any appreciation that occurs after the date of death is new gain that will be taxed. And this is where the trust's compressed tax brackets become a serious issue.

For 2026, trust long-term capital gains tax rates are:⁵

• 0% rate: gains up to $3,300
• 15% rate: gains from $3,300 to $16,250
• 20% rate: gains above $16,250
• Net Investment Income Tax (NIIT): an additional 3.8% applies to undistributed net investment income in a trust above the ~$16,050 ordinary income threshold

A trust reaching $50,000 of long-term capital gain in a year pays 23.8% federal on virtually all of it — 20% plus NIIT. An individual beneficiary in the 15% capital gains bracket would pay only 15% on the same gain. On a $50,000 gain, that difference is $4,400 in additional federal tax, year after year, if the trust accumulates the gain rather than distributing or the stock appreciates inside the trust.

The window matters: Shortly after death, when the trust's cost basis is fresh and embedded gain is near zero, selling is tax-cheap. As time passes and the stock appreciates further, the tax cost of selling inside the trust grows. This is why acting early — with a clear plan — is usually better than waiting.

Why capital gains generally can't be distributed to shift the bracket

The natural solution sounds simple: just distribute the appreciated shares to beneficiaries and let them sell at their own lower rates. In practice, capital gains create a significant obstacle.

Under the default tax rules, capital gains are allocated to trust principal (corpus), not to distributable net income (DNI).⁶ Only income included in DNI can be deducted by the trust when distributed to beneficiaries. This means the trustee cannot ordinarily distribute capital gains out of the trust in a way that shifts the tax burden to beneficiaries.

There are two exceptions to watch for:

• Trust instrument provision: Some trust documents give the trustee discretion to treat capital gains as distributable income, or specifically include realized capital gains in DNI. If your trust instrument has this language, consult a CPA — capital gains may be distributable and taxable at beneficiary rates.
• State law: A minority of states have enacted principal and income rules that can allow gains to be allocated to income in certain circumstances. Your trust's governing law matters.

For most trusts under the default rules, the correct strategy is not distributing the shares after selling — it is distributing the shares in kind to beneficiaries and letting them sell at their individual rates. An in-kind distribution transfers the trust's basis to the beneficiary; there is no sale and no tax event at the trust level. The beneficiary then sells at their own rate — often 15% rather than the trust's 23.8%.

The retention power clause: when the trust document changes the analysis

Some trust documents explicitly authorize the trustee to retain concentrated positions. Common language includes:

"The trustee is authorized to retain any property, including securities of a single issuer, received by the trust without liability for any loss or depreciation resulting from such retention."

A retention power clause does not eliminate the UPIA duty to diversify — it modifies the standard of care.⁷ Courts have held that a retention clause shifts the analysis but does not provide blanket protection for indefinite concentration. The trustee still must consider whether retaining the position continues to make sense given the current facts: the size of the position, the beneficiaries' needs, market conditions, and the trust's time horizon.

If your trust document has a retention clause, read it carefully. Document why continued concentration is consistent with the clause and consistent with the trust's overall investment policy. A retention clause that was appropriate when the settlor created the trust in 2002 does not automatically justify holding a position that now represents 90% of a trust serving an 80-year-old income beneficiary.

The distribute-in-kind strategy: shifting where the gain is taxed

For a trust with discretionary distribution powers, one of the most effective strategies for a concentrated position is distributing shares in kind to beneficiaries rather than selling inside the trust.

Here is how it works:

1. The trustee makes an in-kind distribution of shares to one or more beneficiaries. No sale occurs; no capital gain is realized at the trust level.
2. The beneficiary receives the shares with the trust's carryover basis (the date-of-death stepped-up value, or the trust's current basis if appreciation has occurred since death).
3. The beneficiary decides when to sell and pays capital gains at their individual rates — potentially 0% or 15% rather than the trust's 23.8%.

The tax savings can be substantial. On $100,000 of gain distributed to a beneficiary in the 15% bracket versus taxed inside the trust at 23.8%, the difference is $8,800 in federal tax on that transaction alone.

Impartiality caution: If the trust has both an income beneficiary (e.g., surviving spouse) and remainder beneficiaries (e.g., adult children), distributing the stock in kind to one beneficiary but not another raises impartiality concerns under UPIA § 6. The trustee must consider the interests of all beneficiaries — not just the ones who want the stock. Any in-kind distribution plan should be documented against the UPIA impartiality standard and, where there is potential for conflict, reviewed with an attorney.

Charitable strategies for post-death appreciation

If the stock has appreciated significantly since the date of death — meaning the trust now holds a large unrealized gain — and one or more beneficiaries have charitable intent, two strategies can reduce the tax cost of eventually selling:

Donor-advised fund contribution

The trustee can contribute appreciated shares directly to a donor-advised fund (DAF) rather than selling and donating cash.⁸ The trust receives a charitable deduction for the fair market value of the shares on the date of contribution, and no capital gain is realized. The DAF then sells the shares — tax-free — and the proceeds are invested for eventual charitable grants.

For this to work, the trust instrument must authorize charitable distributions, and the deduction is subject to the trust's adjusted gross income limitations (typically 30% of AGI for appreciated property contributed to a DAF). Most revocable living trusts have charitable distribution authority; check the document.

Charitable remainder trust (CRT)

A CRT is an irrevocable split-interest trust: it pays an annuity or unitrust amount to one or more non-charitable beneficiaries for a term of years or for life, and the remainder passes to charity.⁹ The mechanics for the concentrated-stock problem:

1. The trustee (with beneficiary consent, if required by the trust) transfers appreciated shares to the CRT.
2. The CRT sells the shares — no immediate capital gain recognition because the CRT is a tax-exempt entity.
3. The CRT invests the diversified proceeds and pays income to the beneficiary over the term.
4. At termination, the remainder passes to charity.

The donor receives a partial charitable deduction up front (based on the actuarial present value of the charitable remainder interest). The capital gain from selling inside the CRT is recognized over time as the CRT distributes income to beneficiaries — spread over years rather than recognized all at once.

CRTs add significant complexity: they require their own tax returns (Form 5227), they are irrevocable, and they permanently redirect the remainder to charity. They make sense when the beneficiaries genuinely want charitable impact and the concentrated position is large enough — typically $500,000 or more — to justify the setup and ongoing administration cost.

What the trustee must document

Whether you sell immediately, distribute in kind, hold, or use a charitable strategy, the trustee must document the decision-making process. The UPIA standard is not "make the right call" — it is "follow a prudent process."¹ Documentation is your protection in a surcharge action.

Minimum documentation for any concentrated-position decision:

• Date-of-death basis: Written record of the date-of-death fair market value per share, the source (average of high and low trading prices for publicly traded stock under 26 CFR § 20.2031-2¹⁰), and the resulting cost basis. This is the starting point for all subsequent gain calculations.
• UPIA analysis: A written note in the trustee's records explaining: (a) you identified the concentration; (b) you considered diversification; (c) the reason for the chosen course of action (sell, distribute in kind, hold per retention clause, etc.); (d) the time frame for implementation.
• Investment policy statement: If you are holding the position, the IPS should address it explicitly — note the concentration, the rationale for retention, the monitoring plan, and the trigger that would cause a change.
• Beneficiary communication: If the decision affects the income/remainder balance (e.g., selling a non-income-producing stock and reinvesting in income-producing assets), document that you considered impartiality under UPIA § 6 and notified beneficiaries.

A decision framework for newly-named trustees

When you first take over a trust with a concentrated stock position, work through this sequence:

1. Establish the stepped-up basis immediately. Document the date-of-death price for every concentrated holding. This resets the gain calculation and often changes the analysis entirely.
2. Read the trust document for a retention clause. If there is one, note it — but also note it doesn't eliminate the UPIA duty; it modifies it.
3. Assess the concentration percentage and risk profile. A 40% position in a large-cap index fund is different from a 40% position in a single employer's stock. Employer stock with lockup periods or insider-trading restrictions adds another layer of complexity that should be flagged to a securities attorney before any transaction.
4. Identify the tax cost of each exit strategy: Sell inside the trust (23.8% above $16,250 for 2026), distribute in kind to beneficiaries (their rates), or use a charitable strategy. Run numbers on each.
5. Consider timing: The step-up window is the cheapest time to act. If the position has already appreciated significantly since death, the tax cost of selling inside the trust has grown. Distribute in kind if you can.
6. Communicate with beneficiaries. Beneficiaries who receive annual trust accountings should know about concentrated positions, the UPIA analysis, and the plan. Surprises later become disputes.
7. Document everything. Whatever you decide, write it down.

How a fee-only advisor helps with concentrated positions

Managing a concentrated position in a trust is a tax-and-investment problem that requires coordinating the trust document, tax law, and investment strategy. A fee-only advisor — one who does not receive commissions on sales — brings specific value here:

• Basis documentation: Calculating and documenting date-of-death fair market values for all positions, including less-liquid holdings that require appraisals
• Tax scenario modeling: Running the numbers on sell-inside-trust vs. distribute-in-kind vs. hold, and quantifying the tax cost of each path over the expected administration period
• Investment policy statement: Drafting an IPS that addresses the concentrated position explicitly — satisfying the UPIA documentation requirement
• CRT analysis: Modeling whether a charitable remainder trust makes financial sense given the position size, the beneficiaries' income needs, and their charitable intent
• UPIA compliance documentation: Creating the written record that protects the trustee if a beneficiary later challenges the investment decision
• Coordination with CPA and attorney: The concentrated-position decision touches tax (CPA for gain calculations and distributions) and trust law (attorney for retention clauses and in-kind distributions). An advisor who has worked with trustees coordinates this team rather than leaving the trustee to manage three professionals independently

Note what a fee-only advisor does not do: they do not earn a commission on trading activity. This matters for concentrated stock because a commissioned advisor has a financial incentive to churn the position — to keep trading rather than recommending the most tax-efficient path. The UPIA standard requires the trustee to act in the beneficiaries' best interests; that standard is better served by an advisor whose compensation is not tied to the transaction.

Sources

1. Uniform Law Commission — Uniform Prudent Investor Act (1994). § 3 (Diversification), § 6 (Impartiality), § 8 (Duties at inception of trusteeship — reasonable time to comply). Enacted in all 50 states with minor variations.
2. Restatement (Third) of Trusts § 90 (Prudent Investor Rule). Trustee liability for failure to diversify; surcharge standard. LII / Cornell Law School.
3. IRC § 1014 — Basis of property acquired from a decedent. Date-of-death step-up (or step-down) to fair market value. Applies to assets in a revocable living trust. LII / Cornell Law School.
4. IRC § 1223(11) — Holding period of property acquired from a decedent. Inherited property is treated as held for more than one year regardless of actual post-death holding period. LII / Cornell Law School.
5. IRS Form 1041-ES (2026) — Estimated Income Tax for Estates and Trusts. 2026 trust capital gains rate schedule: 0% ≤ $3,300; 15% $3,300–$16,250; 20% above $16,250. Per IRS Rev. Proc. 2025-32. NIIT threshold ~$16,050.
6. IRC § 643(a) — Distributable Net Income (DNI). Capital gains allocated to corpus are generally excluded from DNI; exceptions for trust instrument language and state law. LII / Cornell Law School.
7. Kitces — Trustee Duty to Diversify a Concentrated Stock Position Under the Prudent Investor Rule. Retention clause analysis; how courts treat inaction on concentrated positions; practical documentation guidance.
8. IRS — Donor-Advised Funds. Deduction timing, AGI limitations for appreciated property contributions, and no capital gain recognition on in-kind transfers to DAFs.
9. IRS — Charitable Remainder Trusts. CRT mechanics, Form 5227 filing requirements, CRUT vs. CRAT structure, no-gain recognition on initial asset transfer to tax-exempt CRT.
10. 26 CFR § 20.2031-2 — Valuation of stocks and bonds. Date-of-death fair market value = mean of high and low trading prices on the valuation date. Interpolation rule when no trades on date of death. LII / Cornell Law School.

This guide covers federal tax rules for trusts. State income tax treatment of trust capital gains, retention power clauses under state trust law, and in-kind distribution rules vary by state. Consult a fee-only financial advisor and a trust attorney for your specific situation. Tax bracket values verified against 2026 IRS Rev. Proc. 2025-32. Estate tax exemption reflects OBBBA (July 2025), which permanently set the federal exemption at $15M.