The Timing is Interesting

We posted on March 22 that various Senators urged the IRS to make some changes to estate tax rules. We now have the first change.

Back on March 22 we had posted on a letter by four Senators to the IRS urging them to make some changes to various estate tax rules. We now have the first response from the IRS.

On March 29, the IRS released Revenue Ruling 2023-2 indicating that assets placed into a grantor trust will not get a step-up in basis at death if they are not included in the taxpayer’s estate.

There has been a long-term debate on whether these assets should get a step-up. Many tax professionals argued that a termination of a grantor trust at death is somehow a bequest which would allow the step-up.

This Revenue Ruling puts that debate to bed and indicates no step-up unless somehow the assets are included in the estate.

However, if the taxpayer has a large amount of lifetime exemption available, the taxpayer can continue to transfer highly appreciated assets out of the grantor trust and replace it with other assets. Here is an example:

John creates a grantor trust during life and transfers land into the trust that has a current value of $8 million and a basis of $2 million. His health is failing and has $8 million of cash outside the trust and has lifetime exemption of $9 million remaining. He can transfer the cash into the trust and receive the land and the estate will get a step-up at his death with no estate tax owed.

This is also a provision that the Senators would like the IRS to change, but that has not happened yet.