Trust Me, It’s Fun: A Lighthearted Look at Irrevocable Trusts and Step-Up Basis in Revenue Ruling 2023-2
Hey there, tax fans! Ready for a wild ride through the land of IRS Revenue Rulings? Buckle up, because today we’re diving into Revenue Ruling 2023-2, and we promise to make it as fun and engaging as possible. After all, who said taxes can’t be entertaining? Let’s go!
Picture this: Alex has an irrevocable trust (we’ll call it “Trusty”), and they’ve got a valuable asset in it. Alex is wondering if the asset will get a “step-up in basis” when they pass away. You might be thinking, “Step-up in what now?” Don’t worry – we’ll explain!
A “step-up in basis” is a tax concept that adjusts the value of inherited assets to their fair market value at the time of the owner’s death. But the real question is whether Trusty’s asset will get this tax perk. The answer, courtesy of the IRS, is a resounding “Nope!”
So, why doesn’t Trusty’s asset get the step-up? Let’s break it down into facts, laws, analysis, and holdings so you can see for yourself.
Facts Alex creates Trusty and puts a valuable asset in it. The trust is set up in a way that excludes the asset from Alex’s estate when they pass away. As time goes by, the asset’s value goes up.
Laws Here’s a quick look at the tax laws that come into play:
- Section 671: How a person’s taxable income is determined when they’re treated as the owner of a trust.
- Section 1012(a): The basis of property is its cost, except in some special cases.
- Section 1014(a)(1): The basis of property acquired or passed from a decedent is the fair market value at the time of the decedent’s death.
- Section 1014(b): Lists seven types of property that qualify for a step-up in basis.
Analysis Trusty’s asset doesn’t qualify for a step-up in basis because it doesn’t meet any of the seven special cases listed in the tax law (§ 1014(b)). The asset wasn’t “bequeathed,” “devised,” or “inherited.” It was placed in Trusty before Alex’s death and didn’t pass either by will or intestacy. Also, Alex didn’t have any special powers over Trusty, and the asset wasn’t community property or part of Alex’s estate.
Holding The IRS concludes that Trusty’s asset doesn’t get a step-up in basis when Alex passes away because it wasn’t acquired or passed from a decedent as defined in the tax law. So, the basis of the asset remains the same as it was before Alex’s death.
In a nutshell, if you have an irrevocable trust like Trusty, remember that the assets in it might not get that sweet step-up in basis when you pass away. It’s a bummer, but hey, that’s taxes for you! When in doubt, consult a tax expert to make sure you understand the ins and outs of your trust.
And there you have it – a fun, engaging, and easily digestible look at Revenue Ruling 2023-2. Now go forth and share your newfound tax wisdom with the world!
***Disclaimer: This communication is not intended as tax advice, and no tax accountant -client relationship results**