Tax Issues and IRS Guidance for Irrevocable Grantor Trusts

The significant increase in the federal estate tax exemption under current tax law emphasizes the need for estate planners to minimize income taxes for beneficiaries on assets passed through inheritances and trusts. Revenue Ruling 2023-2 provides guidance regarding the tax basis for assets for certain trusts for federal income tax purposes passing from a decedent upon the owner's death and other key issues. Estate planners and advisers must have a complete understanding of current tax rules and IRS guidance and their potential impact on estate and tax planning.

As fewer estates are subject to estate or gift tax, planners and fiduciary advisers must focus on managing tax basis to minimize the tax cost of transferring assets to beneficiaries. Section 1014 allows inheritors to step up the tax basis of assets, which may reduce capital gains taxes. The basis consistency rules allow the IRS to assess penalties under Section 6662 against the estate or beneficiary for basis reporting inconsistencies stemming from valuations aimed at eliminating income taxes. This accuracy-related penalty for the underpayment of tax resulting from a valuation misstatement can be costly for estates and beneficiaries.

Estate planners must ensure that any valuation of assets for the purpose of achieving a step-up in basis adheres to the tax basis rules under current law and recently issued Revenue Ruling 2023-2. Estate planning advisers must also consider other options such as gift planning techniques, transfers of assets, and the use of trusts to obtain a step-up in basis and avoid the severe consequences of a misstep.

Listen as our panel discusses options and key provisions in structuring trusts, Revenue Ruling 2023-2 and its impact on basis and estate and tax planning, determining and substantiating tax basis, planning considerations for U.S. persons, and other tax issues and basis conundrums encountered by estate and trust advisers