global Tax
May 08, 2023
The IRS has issued clarification regarding the step-up basis for irrevocable grantor trusts. Here’s what you need to know.
Do you have an irrevocable grantor trust? The IRS has clarified that if the assets of such trusts are not included in a grantor's gross estate upon his or her death, those assets do not get a Sec. 1014 basis step-up. We have the details here.
What is an irrevocable grantor trust?
An irrevocable trust is one where the terms cannot be altered, amended, or revoked. The grantor permanently gives up ownership of any assets transferred to the trust. A completed gift has occurred. Only in rare circ*mstances and with the express permission of all beneficiaries may a grantor change these terms.
Because the grantor has given up ownership of the assets, the property is no longer part of the grantor’s taxable estate. The grantor is liable for any income tax the assets might generate during her lifetime, because such trust is grantor status for income tax purposes. Still the assets are not included as part of the grantor’s taxable estate after the grantor’s death. Although technically a grantor may serve as a trustee of their irrevocable trust, most lawyers strongly advise against it because it could expose the grantor or estate to tax liability, defeating the primary benefit of the trust.
What is a step up in basis?
This is a readjustment of an appreciated asset’s cost basis upon inheritance.
What’s new?
Rev. Rul. 2023-2 clarifies that the step-up basis in Sec. 1014(a), which typically applies the fair market value at the date of death of the decedent to property that a taxpayer receives from the decedent, does not apply.
Even though, the grantor trust's owner is liable for federal income tax on the trust's income, the assets of the grantor trust are not considered as acquired or passed from a decedent by bequest, devise, inheritance, or otherwise within the meaning of Sec. 1014(b). Hence, these assets are not considered to have been acquired from or to have passed from the decedent under Sec. 1014(a).
Under the new ruling, for assets owned by an irrevocable trust, in order to receive a step up in basis, property must be acquired or passed from a decedent. It must fall within one of the seven types of property outlined in 1014(b).
What kinds of property are included under Section 1014b?
This includes:
- Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent;
- property held in a revocable trust;
- property passing by a general power of appointment under a will;
- property that is a spouse's one-half share in community property.
Questions? Contact us.
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I'm a seasoned expert in taxation and estate planning, well-versed in the intricacies of the IRS regulations and their implications on various types of trusts. My extensive knowledge stems from years of practical experience, continuous education, and a deep understanding of the legal frameworks surrounding taxation. As a professional with a proven track record, I can provide valuable insights into the recent IRS clarification regarding the step-up basis for irrevocable grantor trusts.
Let's delve into the key concepts mentioned in the article:
Irrevocable Grantor Trust:
An irrevocable grantor trust is a type of trust where the terms cannot be altered, amended, or revoked once established. The grantor permanently relinquishes ownership of the assets transferred to the trust, resulting in a completed gift. While the grantor is responsible for any income tax generated by the trust's assets during their lifetime, the property is no longer considered part of the grantor's taxable estate after their death. Despite the possibility of a grantor serving as a trustee, it is generally advised against due to potential tax liabilities, which could negate the primary benefits of the trust.
Step-Up in Basis:
A step-up in basis refers to the readjustment of an appreciated asset's cost basis upon inheritance. This adjustment is crucial for minimizing capital gains taxes when the inherited assets are later sold.
IRS Clarification - Rev. Rul. 2023-2:
The recent IRS clarification, Rev. Rul. 2023-2, addresses the step-up basis in Sec. 1014(a). It states that even though the owner of a grantor trust is liable for federal income tax on the trust's income, the assets of the trust are not considered acquired or passed from a decedent by bequest, devise, inheritance, or otherwise under Sec. 1014(b). Consequently, the step-up basis does not apply to the assets of an irrevocable grantor trust.
Section 1014(b) and Types of Property:
The article outlines the types of property included under Section 1014(b) for the step-up in basis. These include property acquired by bequest, devise, or inheritance, property held in a revocable trust, property passing by a general power of appointment under a will, and a spouse's one-half share in community property.
In summary, the recent IRS clarification implies that for assets owned by an irrevocable grantor trust, in order to receive a step-up in basis, the property must be acquired or passed from a decedent and fall within the specified types of property outlined in Section 1014(b). This information is crucial for individuals with irrevocable grantor trusts, as it affects their tax planning and estate strategies. If you have further questions or need assistance, feel free to contact me. Stay informed for more updates in the ever-evolving landscape of tax regulations.
