New IRS Guidance for Irrevocable Grantor Trusts: 1014 Basis Adjustments, Key Issues for U.S. Persons

Description

The significant increase in the federal estate tax exemption under current tax law emphasizes the need for estate planners to minimize income taxes for beneficiaries on assets passed through inheritances and trusts. Recently issued Revenue Ruling 2023-2 provides guidance for certain trusts for federal income tax purposes regarding the tax basis for assets passing from a decedent upon the owner's death and other key issues. Estate planners and advisers must have a complete understanding of these rules and their potential impact on estate and tax planning.

As fewer estates are subject to estate or gift tax, planners and fiduciary advisers must focus on managing tax basis to minimize the tax cost of transferring assets to beneficiaries. Section 1014 allows inheritors to step up the tax basis of assets, which may reduce capital gains taxes. The basis consistency rules allow the IRS to assess penalties under Section 6662 against the estate or beneficiary for basis reporting inconsistencies stemming from valuations aimed at eliminating income taxes. This accuracy-related penalty for the underpayment of tax resulting from a valuation misstatement can be costly for estates and beneficiaries.

Revenue Ruling 2023-2 has confirmed that the basis adjustment under section 1014 generally does not apply to assets of an irrevocable grantor trust not included in the decedent’s estate for federal estate tax purposes. However, estate planners and other advisors still have several tools for basis planning available to them for clients who will likely have taxable estates and those that likely will not.

Estate planners must ensure that any valuation of assets for purposing of achieving a step-up in basis adheres to the tax basis rules under current law and recently issued Revenue Ruling 2023-2. Estate planning advisers must also consider other options such as gift planning techniques, transfers of assets, and the use of trusts to obtain a step-up in basis and avoid the severe consequences of a misstep.

Listen as our panel discusses options and key provisions in structuring trusts, Revenue Ruling 2023-2 and its impact on basis and estate and tax planning, determining and substantiating tax basis in light of recent IRS guidance, planning considerations for U.S. persons, and other basis conundrums encountered by estate and trust advisers.