In Rev. Rul. 2023-2, the IRS ruled there is no basis adjustment under Section 1014 for assets of an irrevocable grantor trust not included in the grantor decedent’s gross estate.
Grantor trusts are generally disregarded for federal income tax purposes, meaning all income from a grantor trust is taxed to the grantor. One common estate planning technique involves transferring assets to an irrevocable grantor trust, which can be treated as a completed gift for estate and gift tax purposes, while at the same time retaining certain powers to the grantor, resulting in the grantor paying tax on the trust’s income.
Section 1014 of the Internal Revenue Code generally provides that property must be acquired or passed from a decedent in order to receive a basis adjustment. Such basis adjustments allow taxpayers to adjust basis to fair market value as of the decedent’s date of death. Basis adjustments under Section 1014 can allow heirs to avoid unrealized capital gains following the passing of a decedent.
Prior to Rev. Rul. 2023-2, several well-known estate planners had argued that assets held by an irrevocable grantor trust should receive a basis adjustment at the grantor’s death even when those trust assets are not included in the grantor’s estate for estate tax purposes.
Most estate planners taking a more conservative approach disagreed with this position and did not believe that stepped basis for assets held in an irrevocable grantor trust is appropriate without the assets being included in the decedent’s gross estate at death. The former position drew the concern of several congressional lawmakers and was also included as an item for IRS guidance under the Treasury-IRS 2022-2023 Priority Guidance Plan.
Rev. Rul. 2023-2 confirms that the IRS will not allow stepped-up basis for assets of an irrevocable grantor trust when those assets are not included in the grantor’s gross estate. Rev. Rul. 2023-2 is a helpful reminder to taxpayers of the strict confines of Section 1014 and the IRS’s willingness to challenge aggressive tax positions on basis reporting.
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This article is provided for general informational purposes only. It is not legal, accounting or other professional advice, as it does not address any individual facts, circumstances or concerns. Before making personal or business related decisions, please consult with appropriate legal, accounting or other qualified professionals.
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