One recent development that has stirred conversations among investors and advisors alike is the issuance of the IRS Revenue Ruling 2023-2.
This ruling has presented a unique set of challenges and opportunities for estate planning, especially for those employing irrevocable trusts as part of their wealth management strategy.
The Stealth Shift by the IRS
In March 2023, the IRS subtly altered the rules on the tax treatment of assets held in irrevocable trusts. This change, detailed in Revenue Ruling 2023-2, has significant implications for the future of estate planning.
The ruling states that assets held in an irrevocable trust ‘that is not included in the taxable estate at death’ will no longer receive a step-up in basis.
Understanding the Step-Up In Basis
To comprehend the full scope of this change, it’s crucial to understand what ‘step-up in basis’ means. When an individual acquires an asset, its original cost is considered its ‘basis.’ If the asset appreciates over time, the difference between the initial basis and the selling price is what generates a capital gain, which is subject to capital gains tax.
Historically, there has been an exception to this rule when assets are transferred upon the death of the owner. In this instance, the basis is ‘stepped-up’ to the fair market value at the time of the owner’s death, effectively eradicating any capital gains and associated taxes.
Impact on Irrevocable Trusts
In the past, it was ambiguous whether assets transferred via an irrevocable trust would benefit from the step-up in basis. Many families have used irrevocable trusts to safeguard their assets from spend-down, aiming to qualify for government benefits such as Medicaid and VA Aid and Attendance.
The new IRS ruling has clarified that assets held in an irrevocable trust that is not included in the taxable estate at death will no longer receive a step-up in basis. This implies that the potential for capital gains tax may loom over any significant asset appreciation since the original purchase.
How We Can Help
These changes by the IRS could significantly affect estate planning, adding potential tax burdens for beneficiaries of irrevocable trusts. This makes it all the more crucial for individuals to have an open line of communication with their advisors.
In a dynamic financial landscape, adaptability is key to securing your future. The recent regulatory developments highlight the significance of tailoring your estate planning approach to align with changing circumstances. At West Advisory Group, we understand the essence of a resilient investor-advisor partnership.
Our invitation is simple: let’s embark on a journey together to explore your aspirations. By scheduling a complimentary consultation, you’ll gain insight into how our proven PEAK FORMula can be your compass to success. This personalized process stands as a testament to our commitment to your financial well-being.
At West Advisory Group, we’re not just advisors; we’re your collaborators in navigating the intricate world of finance. Our PEAK FORMula is more than a strategy – it’s a signature approach that encompasses the expertise of our extended network. From retirement planning to wealth preservation, every facet of your financial journey is met with meticulous attention.
Don’t merely adapt – thrive. By fostering an open dialogue, we ensure you stay informed about the shifting financial tides and their implications. Together, we’ll safeguard what matters most: the seamless transition of your wealth, shaping a prosperous legacy for generations to come. The first step is yours. Contact us today to arrange a conversation that could reshape your financial future.
