The IRS recently released a new revenue ruling through an advance version of Rev. Rul. 2023-2, which concludes that the basis adjustment under section 1014 generally does not apply to the assets of an irrevocable grantor trust not included in a deceased grantor’s gross estate for federal estate tax purposes. Section 1014 generally provides that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent, if not sold, exchanged, or otherwise disposed of before the decedent’s death by that person, is the fair market value of the property at the date of the decedent’s death. In Rev. Rul. 2023-2, the IRS determined that the basis “step-up” under section 1014 does not apply to assets gifted to an irrevocable grantor trust by completed gift in cases in which such assets are not included in the gross estate of the owner of the trust for federal estate tax purposes. In such cases, even though the grantor trust’s owner is liable for federal income tax on the trust’s income, the assets of the grantor trust are not considered as acquired or passed from a decedent by bequest, devise, inheritance, or otherwise within the meaning of section 1014(b), and therefore section 1014(a) does not apply.

This new revenue ruling clarifies that if you put a property or asset into an irrevocable trust with someone other then the Grantor as the beneficiary and with another person as the trustee, the property is not seen as yours and thus will not have a step up in basis upon the death of the Grantor, since in this scenario the Grantor no longer owned the property.

The exception would be if the Irrevocable Trust were an Intentionally Defective Grantor Trust, (IDGT) where the trust actually has a small defect in the document, making the gift incomplete and thus still a part of the Grantor’s estate.

Talk to us if you have other questions about the IDGT or about step up in basis laws