What does IRS Revenue Ruling 2023-2 mean for an estate?

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Q. What is IRS Revenue Ruling 2023-2? What does it mean? What is a taxable estate that the ruling does not cover?
— Confused

A. hanks for the question.

Let’s go through this step by step.

By way of background, the Internal Revenue Service (IRS) defines a revenue ruling as “an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations” that serves as a conclusion as to “how the law is applied to a specific set of facts,” said Tom Szieber, a trusts and estates attorney at Avelino Law in Morristown.

Section 1014(a) of the Internal Revenue Code provides that except as specifically provided by that Code section, the basis (in most situations, its cost) of “property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent, if not sold, exchanged or otherwise disposed of before the decedent’s death by that person is the fair market value of the property on the date of the decedent’s death,” Szieber said

“This basis adjustment, usually referred to as a `step-up’ or `step-down- in basis — depending on whether the fair market value ends up higher or lower than before the adjustment — is an important concept in estate planning, as decision-making on how to dispose of real property, stocks and other capital assets in a manner resulting in the most favorable possible tax consequences often depends on whether or not such an asset will receive a step-up,” he said.

A gift completed during the donor’s lifetime will pass to the donee with a “carryover basis,” that is, the basis held by the donor, he said.

Now to your specific question.

Revenue Ruling 2023-2, which was released in March 2023, deals only with a specific type of trust: an irrevocable grantor trust known as a “intentionally defective grantor trust (IDGT),” he said.

“The unique feature of this type of trust is that the grantor is taxed on all of the trust income for federal income tax purposes even though the grantor does not own the property for estate tax purposes,” Szieber said. “The grantor is treated as the `owner’ of the property for income tax purposes. It is not uncommon for the value of property gifted to a trust to increase in value by the time the grantor dies.”

Szieber said Revenue Ruling 2023-2 concluded that the step-up or step-down is generally inapplicable to assets that have been gifted to an IDGT and are not includable in the gross estate of the trust’s owner.

“This is because any such asset does not fall under any of the types of property set forth in section 1014(b), which lists the types of property that qualify as being `acquired from or to have passed from’ the decedent — including property acquired by bequest, devise or inheritance and property passing without full and adequate consideration under a general power of appointment, among others,” he said.

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This story was originally published on Oct. 13, 2023.

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