Estate Planning Alert: New IRS Rule Changes the Game for Irrevocable Trusts
Understanding the Step-Up in Basis
When inheriting an asset with unrealized capital gains, the basis of the asset resets to its current fair market value, eliminating any tax liability for the previously unrealized capital gains. For instance, if you inherited stock purchased for $100,000 and now worth $250,000, your new basis would be $250,000, and you’d only pay tax if you sold it for more than that amount.
The Role of Irrevocable Trusts in Estate Planning
Many individuals place assets in an irrevocable trust to protect them, relinquishing ownership rights to the assets. The trust becomes the owner, benefiting its beneficiaries. However, the new IRS ruling, Rev. Rul. 2023-2, changes how the step-up in basis applies to assets held in these trusts.
The Impact of the New Rule
Unless the assets are included in the taxable estate of the original owner (or “grantor”), the basis doesn’t reset. To get the step-up in basis, the assets in the irrevocable trust must now be included in the taxable estate at the time of the grantor’s death. This change may affect how you plan your estate.
The Silver Lining: Estate Tax Exemptions
The good news is that few estates in the United States pay estate tax due to the $13.61 million per-person exclusion in 2025 ($25.84 million for married couples). By including the irrevocable trust assets in the taxable estate, heirs can avoid the tax hit and receive the step-up in basis.
Why Use an Irrevocable Trust?
A common reason is to remove assets from ownership to qualify for Medicaid nursing home assistance. For example, a parent could place a $500,000 home into the trust, qualify for Medicaid, and then pass the property on to their children tax-free at a basis of $500,000.
Reviewing Your Estate Plan
If you’re using an irrevocable trust, it’s essential to review your estate plan to ensure it complies with the updated IRS rule and preserves the step-up in basis for assets that the trust will pass on to your heirs. Consider consulting a financial advisor to guide you through your options.
Building a Sufficient Estate Plan
Having a comprehensive estate plan in place can help limit issues for your family down the road. A financial advisor can help you navigate important rule changes and ensure your financial plan stays on track.
Finding the Right Financial Advisor
SmartAsset’s free tool can match you with up to three vetted financial advisors who serve your area. You can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Leave a Reply