Estate planning is an important aspect of financial planning and irrevocable trusts are often an important part of an estate plan. An irrevocable trust is a legal document that allows a grantor to transfer assets into the trust, which are then managed by a trustee for the benefit of the beneficiaries. Unlike a revocable trust, an irrevocable trust owns the assets (taking ownership away from the grantor) making them safe from judgments and creditors of the grantor. An irrevocable trust also allows for assets within the trust to pass outside of the grantor’s taxable estate.

However, a new ruling from the IRS, Rev. Rul. 2023-2, has significant implications for irrevocable trusts. The ruling clarifies that if a grantor dies and assets in the irrevocable trust are not included in the grantor's taxable estate, those assets will NOT receive a step up in basis at the time of the grantor's death.

Step up in basis refers to the increase in the value of an asset for tax purposes when it is inherited by a beneficiary. Essentially, the cost basis of the asset is increased to its fair market value at the time of the original owner's death, which means that the beneficiary can sell the asset for its current value without paying capital gains taxes on the appreciation that occurred during the original owner's lifetime. This can be a significant tax benefit for heirs, particularly for assets that have appreciated significantly over time.

Without a step-up in basis for assets in an irrevocable trust, the beneficiaries of the trust may face a higher tax burden when they sell those assets. The ruling highlights the need for ongoing review and monitoring of estate plans to ensure that they remain up-to-date and in compliance with changing tax laws and regulations.

The new ruling from the IRS, Rev. Rul. 2023-2, has significant implications for irrevocable trusts and estate planning. By working with a qualified estate planner like the ones at Schooley Law Firm, individuals can ensure that their assets are distributed according to their wishes while minimizing tax liability for their beneficiaries.