New revenue ruling on irrevocable trusts and why it doesn’t mean anything new.
There has been a lot of buzz in the estate planning news world about a catastrophic revenue ruling by the IRS. Professional journals and news outlets are screaming about how the IRS is quietly taking away your precious tax breaks when it comes to irrevocable trusts. Clients, financial advisors, and even other attorneys are concerned about losing tax breaks, and wondering whether they need to start completely restructuring the way they do estate planning.
Unfortunately, this is nothing more than ordinarily solid, reliable, and dry publications succumbing to the temptation to post clickbait.
Yes, the IRS published Revenue Ruling 2023-2, which discussed how assets held in most irrevocable trusts do not get a “stepped up cost basis” when the person who put the assets into the trust died. The thing is, this is the way it has been since Reagan was still in the Oval Office and the Revenue Ruling is just stating what should have been obvious. Here is the very basic overview:
- Prior to the overhaul of the estate tax in the late 80s, if your estate was over a certain amount, there were federal estate taxes.
- Whether there were taxes or not, if the next generation sold an asset (like a house), then capital gains taxes were due based on the difference between what the person who died paid for the asset and the new purchase price. So if Dad buys a house at $50,000, dies before the tax change with the house being worth $400,000 and the kids sold the house, there would be capital gains taxes on the $350,000 difference.
- When overhauling the estate tax, a lot of legislators thought this “double taxation” for both estate and capital gains taxes needed to change.
- The new rule was anything that was subject to federal estate taxes, even if they didn’t reach the threshold to pay taxes, would automatically have the cost basis jump to the fair market value of the owner on the date of death. In other words, when the kids sold Dad’s house after the tax changes, the $400,000 house sale didn’t incur capital gains taxes.
- So the very simple rule is: If the asset isn’t subject to estate taxes, then it does not get the adjustment of the cost basis at death. If it is subject to estate taxes, then it does get the adjustment in cost basis. It’s that simple and that’s the way it has been since the change in the late 80s.
That’s it. The simple rule is you only get the stepped-up cost basis if something is part of your taxable estate when you die. If you are putting assets into an irrevocable trust to get it out of your estate for estate taxes, then it doesn’t get this favorable post-death treatment for capital gains taxes.
Then why is the Internet buzzing about this seismic shift in tax policy that isn’t anything new? Clickbait. Plain and simple, it is just clickbait and people are falling for it. It seems that these days of “number seven on the list will shock you” and “you’ll never believe this is true,” even online publications thought of as having high standards of truth and integrity are also chasing clicks, likes, and shares.
For more on the revenue ruling, check out the YouTube video here: https://youtu.be/uOyVHmVS6NU