IRS Revenue Ruling 2023-2 Impacts Step-Up in Basis for Irrevocable Trust Assets

The Internal Revenue Service (IRS) has issued a new ruling, Revenue Ruling 2023-2. It's of particular interest to those involved in planning their estates and affects how certain assets are treated when they're transferred into an irrevocable trust.

What Is a Step-Up in Basis?

Think of the "basis" as the original cost of an asset. Let's say you buy a piece of land for $500 per acre. Years later, it's worth $8,000 per acre. If you sell it, you'd typically pay tax on the difference between the sale price and the original cost - in this case, $7,500 per acre.

However, there's a provision in tax law that essentially "resets" this original cost to the market value at the time of death, called a "step-up in basis." This can greatly reduce or even eliminate the capital gains tax for the person inheriting the property. In simple terms, it's as if the heir bought the property at the current market value, not what was originally paid for it.

What is an Irrevocable Trust?

Unlike the traditional revocable living trust that most clients are familiar with, an irrevocable trust is one that cannot be altered once it's set up. When the grantor (the person who creates the trust) establishes an irrevocable trust and transfers assets into it, making changes to the trust or removing the assets becomes very difficult, if not impossible. Irrevocable trusts are often used in asset protection planning, particularly for clients seeking to remove assets from their estate. This can be an essential strategy for those looking to become eligible for Medicaid benefits.

The Provisions of Revenue Ruling 2023-2

Revenue Ruling 2023-2 clarifies a critical point: assets transferred into an irrevocable trust during the owner's lifetime and removed from their estate won't qualify for this step-up in basis at the time of their death. If the asset stays in the owner's estate through specific legal strategies, the step-up in basis may still apply. But this can affect income taxes while the owner is still alive.

This clarification is especially relevant for those exploring advanced estate planning techniques. While the fundamental rule is now clear, there are still many details and possible ways to navigate it.

Major Takeaway

If you're someone with a standard estate plan, this ruling probably won't affect you. But for those with more complex plans involving irrevocable trusts, it might be time to review your strategy.

The ruling does indeed make things more complex, and it's not something to tackle on your own. The best course of action is to reach out to an attorney knowledgeable in this area. If you believe your plan needs a review or have concerns, don't hesitate to give us a call at (402) 858-0996 or fill out our online contact form.