In March of 2023, the IRS clarified the tax law with Revenue Ruling 2023-2. Some recent articles, blogs, and even TikTok videos concerning this tax ruling have caused some panic and confusion among our estate planning clients. Although we do not provide legal advice on this blog, we would like to clear up the confusion and help you understand what Revenue Ruling 2023-2 actually means for anyone who has created an irrevocable trust. Please, don’t panic!

What is a Tax Ruling?

First, we would like to make sure it is clear that the IRS did not make any changes to the law. Qualified estate planning attorneys have been interpreting tax law in this way for a long time. Revenue Ruling 2023-2 is in fact not making any changes to the law in any way. What it is doing is making clear a very specific point concerning the way your irrevocable trust will be taxed. This ruling will truly only affect a very small percentage of irrevocable trust beneficiaries. 

What Irrevocable Trusts are Affected?

There are two major types of trusts, revocable and irrevocable, and the difference is in the name. With a revocable trust, generally the grantor is able to make changes during their lifetime. Irrevocable trusts are very difficult to modify. The only type of irrevocable trust affected by Revenue Ruling 2023-2 are irrevocable trusts with completed gifts. 

In a nutshell, this means that for tax purposes, the assets in the trust belong to the trust, and are taxed completely separately from the grantor(s) personal assets. This can be an effective strategy to change the tax status of your assets legally, and those assets will not be subject to estate taxes upon your death. If you happen to be one of the lucky few who has more than $12.92 million dollars to pass on to your beneficiaries (or double that for a married couple) you may desire to place your assets into an irrevocable trust with completed gifts, thereby legally preventing those assets from being subject to estate taxes. The ruling clarifies that If your irrevocable trust with completed gifts is NOT subject to estate taxes, then it will not receive a stepped-up basis upon your death.  

What is “Stepped-Up Basis”?

Say that you own a home that you purchased in 1970 for $50,000, but that home is now worth $700,000. If that home legally belongs to you when you die, that property will be stepped-up in basis, meaning that the IRS will recognize that your beneficiaries received an asset worth $700,000. If sold for $700,000, the IRS will not charge capital gains taxes. If you gift your home to your beneficiaries during your lifetime, that home is not stepped-up in basis. If your beneficiaries sell your $50,000 home for $700,000, capital gains taxes will be applied by the IRS.

Revenue Ruling 2023-2 simply clarifies that capital gains taxes will still apply to an irrevocable trust with completed gifts, because the assets within that trust no longer belonged to the grantor at death for tax related purposes. 

Any of our clients whose trust is affected by this ruling will have been informed of this in advance of creating the trust. In addition, this strategy will still provide their beneficiaries with the greatest possible tax benefit, because paying estate tax rates are currently higher than capital gains taxes.

Contact a Qualified Estate Planning Attorney Today

We hope this has cleared up any concerns you may have about your trust. If you have not taken the time to do your planning with an estate attorney, we recommend that you make an appointment as soon as possible. The effects of improper planning (or no planning at all) can be devastating. 

To listen to our full podcast about Revenue Ruling 2023-2, click here