In Revenue Ruling 2023-2, the IRS set forth that assets transferred into an irrevocable trust during the owner's lifetime that are removed from their estate for estate tax purposes won't qualify for a step-up in basis at the time of their death. If the assets are included in the owner's estate for estate tax purposes, then the step-up basis in basis may still be applied.
This seems to be creating a lot of confusion with the public because they are reading it to mean that this applies to ALL irrevocable trusts. This ruling did not change any laws. The IRS is just reconfirming what was already understood by estate and tax attorneys. The assets must be included in the estate for estate tax purposes in order to be eligible for a step-up in basis.
Whether or not the assets of an irrevocable trust are included in an estate for estate tax purposes depends on the specific terms of the trust. While some irrevocable trusts are used specifically to reduce estate taxes, there are other types of irrevocable trusts that are not focused on estate taxes. For example, many middle-class families use irrevocable trusts to protect assets from future nursing home costs or other asset protection goals. These trusts are typically carefully designed so that the assets ARE still included in the estate for estate tax purposes so that the assets will still qualify for a step-up in basis.
If you're someone with a standard estate plan, this ruling probably won't affect you. But for those with more complex plans involving irrevocable trusts, it might be time to review your strategy.
The ruling does indeed make things more complex, and it's not something to tackle on your own. The best course of action is to reach out to an attorney knowledgeable in this area. If you believe your plan needs a review or have concerns, don't hesitate to give us a call at (402) 858-0996 or fill out our online contact form.
