New IRS guidance confirms no step up in basis for grantor trust assets that are not included in the decedent’s estate.

Rev. Rul. 2023-02 clarifies that the basis adjustment under section 1014 of the Internal Revenue Code does not apply to “step up” the basis for assets in grantor trusts treated as owned by the grantor for Federal income tax purposes if such trust assets are treated as excluded from the grantor’s estate for Federal estate tax purposes. Note that Rev. Rul. 2023-02 does not apply to traditional living trusts or revocable trusts which are grantor trusts whose assets are includible in the Settlor’s estates.

The release of this guidance, Revenue Ruling 2023-02, on March 29, 2023, comes after a project on the topic had been added to the IRS’s priority guidance plan in November 2022. Rev. Rul. 2023-02 aims to limit taxpayers’ ability to whipsaw the IRS by using the grantor trust rules to obtain a stepped-up basis for income tax purposes while also “freezing” the value of the wealth for transfer tax purposes (and, i.e., to escape estate or transfer taxes on any appreciation between the date of the transfer and the date of the donor’s death, and the donee to dispose of the property without paying income tax on the appreciation that “escaped” transfer taxation).

New tax and estate law changes like that in Rev. Rul. 2023-02 will have a profound impact on a wide range of tax and estate planning decisions. Sit down with your tax professional when you can to discuss how these changes may affect you and your estate plan based on your unique needs, goals, and circumstances.

Should you have any questions, please contact Kendra Haley Merchant, Robert Angelico, or Leon Rittenberg III.