On March 29, 2023, the IRS issued Revenue Ruling 2023-2, which addresses an unsettled topic related to assets owned by an irrevocable grantor trust. Assets transferred to an irrevocable grantor trust are treated as a completed gift for estate and gift tax purposes but an incomplete gift for income tax purposes.
Until now, the IRS has not provided guidance on whether these assets are granted a step-up in basis upon the death of the grantor. Effective Jan. 1, 2023, the step-up in basis adjustment applies only to assets that are included in the grantor's estate upon their death. This means that assets transferred to an irrevocable trust before the grantor's death, that are not subject to estate tax, will not receive a step-up in basis adjustment to fair market value. The IRS’s reasoning is that the assets inside the trust are not considered as acquired or passed from a decedent by bequest, devise, inheritance or otherwise at the grantor’s date of death.
For example, suppose a grantor transferred shares of stock into an irrevocable grantor trust worth $100,000 during their lifetime. The shares of stock appreciated in value to $150,000 at the time of the grantor's death. After the grantor’s death, the trust sells the shares of stock for $150,000. Under the revenue ruling, the trust tax basis in the stock is the grantor’s basis of the stock at the time of the gift. Accordingly, the stock owned by the trust would not be eligible for a step-up in basis adjustment upon the grantor’s death resulting in taxable gain of $50,000.
To learn more about this ruling and how this may affect estate planning, contact GHJ’s High Net Worth experts.