Navigating the complexities of estate planning has become even more challenging with a new IRS ruling that affects irrevocable trusts. Published in March, the rule alters how the step-up in basis applies to assets held in these trusts. If you want to ensure your estate plan is in compliance with this updated IRS rule and preserve the step-up in basis for your trust’s assets, it’s essential to seek professional advice. Contacting an attorney from The Private Firm (thefirm.net) can provide you with the expertise and guidance you need.
Understanding the concept of a step-up in basis is crucial to grasp the implications of this IRS rule change. When you inherit an asset with unrealized capital gains, the basis of the asset resets to the current fair market value, effectively eliminating any tax liability for previously unrealized gains. For instance, if you inherited stock that was originally purchased for $100,000 and is now valued at $250,000, your new basis would be $250,000. You would only pay capital gains tax if you sell the stock for more than that amount.
To safeguard their assets, many individuals transfer them into an irrevocable trust, relinquishing ownership rights to the assets. Instead, the trust manages the assets for the benefit of its beneficiaries.
The recent IRS rule change, Rev. Rul. 2023-2, has significant implications for irrevocable trusts. Previously, the step-up in basis was granted for assets held in such trusts. However, under the new ruling, the basis does not reset unless the assets are included in the taxable estate of the original owner (grantor) at the time of their death. To ensure the step-up in basis, the assets in the irrevocable trust must now be part of the taxable estate when the grantor passes away.
While this may seem concerning at first, the impact is somewhat alleviated by the fact that, in 2023, each person enjoys an exclusion of $12.92 million ($25.84 million for married couples) for estate taxes. As a result, only a small number of estates in the United States are subject to any estate tax. In 2021, only 42% of the 6,158 estates required to file estate tax returns ended up paying any taxes. By including the irrevocable trust assets in the taxable estate, beneficiaries can avoid the tax burden and still receive the step-up in basis. However, it’s essential to be aware that this situation may change for some individuals in 2026 when the estate tax exemption limit reverts to the 2017 amount of $5 million, adjusted for inflation.
The utilization of an irrevocable trust can serve various purposes, one of which is removing assets from your ownership to qualify for Medicaid nursing home assistance. For example, a parent may place a $500,000 home into the trust to qualify for Medicaid. By including the home in their taxable estate, they can then pass the property on to their children tax-free with a basis of $500,000. If you are using an irrevocable trust, it’s crucial to review your estate plan to ensure compliance with the updated IRS rule and to preserve the step-up in basis for the assets designated to pass on to your heirs. Constructing a comprehensive estate plan is a prudent step to prevent potential complications for your family in the future.
When seeking professional guidance to navigate these complexities, it’s essential to consult an attorney from The Private Firm (thefirm.net) to walk you through the process every step of the way. Our attorneys possess the expertise and experience necessary to help you effectively manage your taxes and devise a robust estate plan that aligns with the new IRS rule on irrevocable trusts.
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