diff --git a/lib/AST/DeclContext.cpp b/lib/AST/DeclContext.cpp
index b561b1e22718b..e4f21d07caa6e 100644
--- a/lib/AST/DeclContext.cpp
+++ b/lib/AST/DeclContext.cpp
@@ -348,6 +348,13 @@ swift::FragileFunctionKindRequest::evaluate(Evaluator &evaluator,
       auto *VD = cast<ValueDecl>(dc->getAsDecl());
       assert(VD->hasParameterList());
 
+      if (VD->getDeclContext()->isLocalContext()) {
+        auto kind = VD->getDeclContext()->getFragileFunctionKind();
+        if (kind.kind != FragileFunctionKind::None)
+          return {FragileFunctionKind::DefaultArgument,
+                  kind.allowUsableFromInline};
+      }
+
       auto effectiveAccess =
         VD->getFormalAccessScope(/*useDC=*/nullptr,
                                  /*treatUsableFromInlineAsPublic=*/true);
diff --git a/lib/SIL/IR/SILDeclRef.cpp b/lib/SIL/IR/SILDeclRef.cpp
index 5abf3a81364be..a05a1a15f4b22 100644
--- a/lib/SIL/IR/SILDeclRef.cpp
+++ b/lib/SIL/IR/SILDeclRef.cpp
@@ -442,12 +442,9 @@ bool SILDeclRef::isTransparent() const {
 
 /// True if the function should have its body serialized.
 IsSerialized_t SILDeclRef::isSerialized() const {
-  DeclContext *dc;
   if (auto closure = getAbstractClosureExpr()) {
-    dc = closure->getLocalContext();
-
-    // Otherwise, ask the AST if we're inside an @inlinable context.
-    if (dc->getResilienceExpansion() == ResilienceExpansion::Minimal) {
+    // Ask the AST if we're inside an @inlinable context.
+    if (closure->getResilienceExpansion() == ResilienceExpansion::Minimal) {
       if (isForeign)
         return IsSerializable;
 
@@ -465,6 +462,13 @@ IsSerialized_t SILDeclRef::isSerialized() const {
   // Default argument generators are serialized if the containing
   // declaration is public.
   if (isDefaultArgGenerator()) {
+    // Ask the AST if we're inside an @inlinable context.
+    if (d->getDeclContext()->getResilienceExpansion()
+          == ResilienceExpansion::Minimal) {
+      return IsSerialized;
+    }
+
+    // Otherwise, check if the owning declaration is public.
     auto scope =
       d->getFormalAccessScope(/*useDC=*/nullptr,
                               /*treatUsableFromInlineAsPublic=*/true);
@@ -490,7 +494,7 @@ IsSerialized_t SILDeclRef::isSerialized() const {
 
   // Note: if 'd' is a function, then 'dc' is the function itself, not
   // its parent context.
-  dc = d->getInnermostDeclContext();
+  auto *dc = d->getInnermostDeclContext();
 
   // Local functions are serializable if their parent function is
   // serializable.
diff --git a/test/SILGen/default_arguments_local.swift b/test/SILGen/default_arguments_local.swift
index faf8df999103c..d2d804f1e8a6a 100644
--- a/test/SILGen/default_arguments_local.swift
+++ b/test/SILGen/default_arguments_local.swift
@@ -57,3 +57,16 @@ class ArtClass<T> {
     return 0
   }
 }
+
+// Default arguments of local functions inside @inlinable contexts should be serialized.
+// https://bugs.swift.org/browse/SR-12404
+
+// CHECK-LABEL: sil [serialized] [ossa] @$s23default_arguments_local5outeryyF : $@convention(thin) () -> () {
+@inlinable public func outer() {
+  // CHECK-LABEL: sil shared [serialized] [ossa] @$s23default_arguments_local5outeryyF5innerL_1xySi_tFfA_ : $@convention(thin) () -> Int {
+
+  // CHECK-LABEL: sil shared [serializable] [ossa] @$s23default_arguments_local5outeryyF5innerL_1xySi_tF : $@convention(thin) (Int) -> () {
+  func inner(x: Int = 0) {}
+
+  inner()
+}
diff --git a/test/attr/attr_inlinable.swift b/test/attr/attr_inlinable.swift
index 034a19ed56d81..ade8d9e7278c1 100644
--- a/test/attr/attr_inlinable.swift
+++ b/test/attr/attr_inlinable.swift
@@ -9,11 +9,11 @@
 // expected-warning@-1 {{'@inlinable' declaration is already '@usableFromInline'}}
 
 private func privateFunction() {}
-// expected-note@-1{{global function 'privateFunction()' is not '@usableFromInline' or public}}
+// expected-note@-1 2{{global function 'privateFunction()' is not '@usableFromInline' or public}}
 fileprivate func fileprivateFunction() {}
 // expected-note@-1{{global function 'fileprivateFunction()' is not '@usableFromInline' or public}}
 func internalFunction() {}
-// expected-note@-1{{global function 'internalFunction()' is not '@usableFromInline' or public}}
+// expected-note@-1 2{{global function 'internalFunction()' is not '@usableFromInline' or public}}
 @usableFromInline func versionedFunction() {}
 public func publicFunction() {}
 
@@ -306,3 +306,16 @@ public struct PrivateInlinableCrash {
     value ? "YES" : "NO"
   }
 }
+
+// https://bugs.swift.org/browse/SR-12404
+@inlinable public func inlinableOuterFunction() {
+  func innerFunction1(x: () = privateFunction()) {}
+  // expected-error@-1 {{global function 'privateFunction()' is private and cannot be referenced from a default argument value}}
+
+  func innerFunction2(x: () = internalFunction()) {}
+  // expected-error@-1 {{global function 'internalFunction()' is internal and cannot be referenced from a default argument value}}
+
+  func innerFunction3(x: () = versionedFunction()) {}
+
+  func innerFunction4(x: () = publicFunction()) {}
+}
\ No newline at end of file