Is Revenue Ruling 2023-2 a hindrance or an opportunity?

The IRS has recently ruled (Revenue Ruling 2023-2) that a decedent's assets in a grantor trust that were not included in the decedent's gross estate for federal estate tax purposes could not receive a basis adjustment under Internal Revenue Code Section 1014.

This ruling, issued back in March, has caused some consternation – or at least some confusion - in the market. I have a different view. The IRS Rev. Rule 2023-2 denying a basis adjustment under Section 1014 for property acquired from a decedent when the property is held in a grantor trust upon the death of the grantor is a reason for prior clients and future prospects to meet with you.

It may be that this revenue ruling has a narrower impact than it may feel like.

An analysis of Rev. Rul. 2023-2 could look like this:

“A [taxpayer] creates T, an irrevocable trust, retaining a power which causes A to be the owner of the entire trust for income tax purposes under Chapter 1 but does not cause the trust assets to be included in A's gross estate for purposes of Chapter 11.

“If A funds T with an asset in a transaction that is a completed gift for gift tax purposes, the basis of the asset is not adjusted to its fair market value on the date of A's death under §1014 because the asset was not acquired or passed from a decedent as defined in §1014(b). Accordingly, under this revenue ruling’s facts, the basis of the asset immediately after A's death is the same as the basis of the asset immediately prior to A's death.^”

The regulations (Sec. 1.1014-2(b)(2)) generally provide that property is considered to have been acquired from a decedent to the extent such property is includible in the decedent’s gross estate. Note, in this instance, the trust instrument was written so that the trust assets would not be included in A’s estate.

Are you confused yet?

I won’t debate the wisdom or facility like Forbes did when their headline read “Revenue Ruling 20232 Got It Wrong?” I believe that the headlines tell us the things our clients and prospects are interested in and offer a timely messaging topic to reach out.

How this revenue ruling applies to a sample profile client

So who would this ruling apply to and how can you be part of the solution? Let’s look at a sample profile client.

Let's consider a high net worth individual named John who owns significant assets and wants to ensure their long-term protection and distribution according to his wishes.

John is concerned about estate taxes, potential creditors and lawsuits that may arise in the future. To address these concerns, John establishes an irrevocable trust.

By placing his assets into an irrevocable trust, John effectively transfers legal ownership and control of those assets to the trust and its designated trustee. Although the IRS change doesn't negate this step, it does make changes to the reason a person might include some types of assets in an irrevocable trust.

As a result, those assets are no longer considered part of John's taxable estate, reducing the potential estate tax burden upon his death.

Additionally, the assets held in the irrevocable trust are shielded from potential creditors or lawsuits targeting John personally. Since John no longer owns these assets, they are not subject to claims made against him individually, providing a layer of asset protection.

Furthermore, an irrevocable trust allows John to determine specific terms for the distribution of assets, ensuring that his beneficiaries receive their inheritance as he intends. This is particularly useful when there are complex family situations, such as blended families or beneficiaries with special needs, where customized provisions can be established.

John, as a high net worth individual seeking asset protection, estate tax mitigation and control over the distribution of his wealth, would greatly benefit from establishing an irrevocable trust.

In this framework I did not address "basis step up," which to my reading of the IRS ruling is what has changed. To me, the IRS change, as stated previously, does make changes to the reasons a person might include some types of assets in an irrevocable trust.

As always, have a qualified attorney, an accountant and a tax advisor as part of your team, and be the first to market with this message to set yourself apart from other advisors!

(Thanks to Gene Bond and Gary Oman for your input in this article.)

 

Lloyd Lofton is the founder of Power Behind the Sales. He is the author of The Saleshero’s Guide To Handling Objections, voted 1 of the 11 Best New Presentation Books To Read in 2020 by BookAuthority. Lloyd may be contacted at [email protected].

 

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