IRS: No inclusion in estate means no step of basis in assets held in irrevocable grantor trust

March 29, 2023

The IRS today ruled that assets of an irrevocable trust that are not includible in the taxable estate of a taxpayer receive no basis step-up at the taxpayer's death. A press release announcing the ruling explains:

Revenue Ruling 2023-02 confirms that the basis adjustment under section 1014 generally does not apply to the assets of an irrevocable grantor trust not included in the deceased grantor’s gross estate for Federal estate tax purposes. Section 1014 of the Internal Revenue Code does not apply to “step-up” the basis of assets gifted to an irrevocable grantor trust by completed gift in cases in which such assets are not included in the gross estate of the owner of the trust for Federal estate tax purposes. In such cases, 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 § 1014(b), and therefore § 1014(a) does not apply.

The new ruling does not come as a surprise to Ava Archibald of Eide Bailly's Wealth Transition Services practice: 

“Nothing really surprising here as that is how the majority of estate planners in the country have treated those transactions.  There are only a few more aggressive planners that have taken the opinion that you are able to step up assets at death that were transferred during life by a completed gift to an irrevocable grantor trust.

Related: Estate and Gift Tax—Are You Prepared for Changes?

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