By Matthew R. Staul, EA, MBA
According to the IRS-issued Revenue Ruling 2023-2, property held in an irrevocable trust, including your home, that is not included in the taxable estate at death, will no longer receive a step-up in the basis once it is passed down to a beneficiary. For example, if a house was purchased in 1995 for $150,000 and, at the time of the owner’s death, sold for $650,000, the beneficiaries will have to pay taxes on a $500,000 gain if the asset falls into this category. Before the new IRS ruling, the beneficiaries could have used the house’s appraised value at the time of death to determine their stepped-up basis before the sale. This is a significant ruling because, for the most part, when a property sells immediately after the owner’s death, the beneficiaries do not have to pay capital gains tax because of the stepped-up basis. It is very important to start planning for the tax implications of this ruling if you have assets in an irrevocable trust.
What Kind of Property Falls Into this Category? (IRS Rev. Rul. 2023-2)
• Property acquired by bequest, devise, inheritance, or by the decedent’s estate from the decedent
• Property transferred by the decedent during life in trust to pay the income for life to or on the order or direction of the decedent, with the right reserved to the decedent at all times before death to revoke the trust
• In the case of decedents dying after December 31, 1951, property transferred by the decedent during life in trust to pay the income for life or on the order or direction of
the decedent with the right reserved to the decedent at
all times before death to make any change in its enjoyment through the exercise of a power to alter, amend, or terminate the trust
• Property passing without full and adequate consideration under a general power of appointment exercised by the decedent by will
• Property which represents the surviving spouse’s one- half share of community property held by the decedent and the surviving spouse under the community property laws of any State, United States territory, or any foreign country, if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent’s gross estate under chapter 11 or § 811 of the Internal Revenue Code of 1939 (1939 Code).
Matthew R. Staul is an enrolled agent with the Medical Management Consulting Group, Inc., a full-service consulting and accounting firm based in Virginia Beach. mmcgonline.com
