REVENUE RULING 2023-2
- Mitchell Hadley
- Sep 24, 2024
- 2 min read
What is Revenue Ruling 2023-2?
Revenue Ruling 2023-2 focuses on the treatment of assets within irrevocable trusts for tax purposes, specifically concerning the step-up in basis upon the grantor's death. Historically, a step-up in basis allowed assets to be valued at their current market price at the time of death, effectively reducing or eliminating capital gains tax for beneficiaries. However, this ruling clarifies that assets in an irrevocable trust, which are not included in the grantor's taxable estate at death, will not receive this beneficial tax treatment.
Key Implications for Estate Planning:
Loss of Step-Up in Basis: If you've placed assets into an irrevocable trust with the intention of removing them from your taxable estate, these assets might not benefit from the step-up in basis. This could lead to substantial capital gains tax liabilities when these assets are eventually sold by beneficiaries.
Revocable vs. Irrevocable Trusts: The ruling underscores the distinction between revocable and irrevocable trusts. Assets in revocable trusts generally remain part of your estate, thus retaining the step-up in basis. Conversely, irrevocable trusts, designed to transfer wealth outside of your estate, face this new challenge.
Strategic Planning: To navigate this ruling, estate planning might now involve more nuanced strategies. For instance, considering whether certain assets should be held in revocable trusts or exploring other mechanisms like gifting strategies that might still allow for a step-up in basis while achieving estate tax benefits.
Tax Implications: This ruling potentially increases the tax burden on beneficiaries, as they could face capital gains on the difference between the asset's original cost basis and its sale price, rather than its value at the time of inheritance.
Review and Amend Existing Plans: If you have an existing irrevocable trust, it's crucial to review it in light of this ruling. Legal adjustments might be necessary to either ensure assets remain in your taxable estate or explore alternative tax planning techniques.
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