The IRS recently ruled that assets held in an irrevocable trust that is not included in the estate at the time of death will no longer get a step up in value. Here’s an article from Kiplinger with more details IRS Quietly Changed the Rules on Your Children’s Inheritance | Kiplinger and here’s a link to the revenue ruling RR-2023-02 (irs.gov)
AJ
Somewhere else I read that this article is somewhat hype. That most practitioners didn’t consider a step up as available here, but there was some aggressive lawyer who tried and now got slapped down. This was fishing gone bad.
Well, now it’s been ruled that the aggressiveness isn’t going to be available to anyone. So, while it may be somewhat hype, it’s still a new ruling that limits step-up in basis for everyone, not just those who are conservative enough in their practices that they were self-limiting.
AJ
I don’t disagree. That’s why sometimes in life there are issues better to keep in the gray area, under the radar, than to insist on having ruled correct.
As a revocable trust becomes an irrevocable trust on the death of the grantor, does this ruling mean that the beneficiaries of the trust will not have the trust assets valued at their FMV?
It is completely dependent on the language of the trust, so you would need to review any trusts that you have set up with your attorney.
If the trust is worded so that the value of the trust is included in the decedent’s estate value, then there will be a step-up to current FMV (assuming the asset is eligible to be stepped up). If the trust is worded so that the value of the trust is not included in the decedent’s estate value, then there will not be a step-up allowed. By not including the trust in the estate value, estate taxes on the value of the trust may be avoided, but beneficiaries have a potential to pay significantly more in capital gains taxes when they sell trust assets than they would have had they received the step-up.
For those who set up trusts specifically to try to avoid estate taxes, this could be an issue.
AJ