Revenue Rule 2023

Don’t Let Overzealous Tax Planning Trigger New Taxes!

My phone has been ringing off the hook-(ask someone over 50 to translate). The calls-and emails, are in response to recent IRS Revenue Ruling 2023-2. The ruling states that assets transferred into an irrevocable trust, which are not includible in the taxpayer’s Estate at death, will go to the new owner with “carryover basis” as opposed to a “stepped up” or Fair Market Value cost basis. In other words, assets in this trust go to the trust beneficiary with a big latent tax hit.

Many people who have irrevocable trusts, are understandably panic-stricken by the notion of causing capital gains taxes for their loved ones. Who should be worried by this recent ruling? Only people who chose the wrong trust! Here are some pointers to help you determine your tax exposure.

Someone with Estate assets valued at less than the current Estate tax threshold (Currently $12.9 million on the federal level) is normally not well served by the type of trust contemplated by the Revenue Ruling. If my assets are below the applicable estate tax threshold, I should WANT the assets to be includible in my gross taxable estate. Why? Because that is how we get the magical “Step Up in Basis” under IRC Sec 1014.

I think that the fundamental misunderstanding out there, is that there are only 2 types of trusts: revocable and irrevocable. That is akin to saying that there are only two colors. There are MANY different types of trusts. For example, we may want an irrevocable trust for long term care and other asset protection objectives. However, we usually also want these assets to be includible in the Estate. If your trust gives you 100% of the lifetime ownership rights to trust real estate, and/or all income from trust property, and/or the ability to change your beneficiaries, then, congratulations- your heirs will have no capital gains taxes. If, on the other hand, your trust is too restrictive, then it may be time to change it. Yes- even irrevocable trusts can be modified!