No basis step-up for assets of irrevocable grantor trust not included in grantor’s gross taxable estate - Rev. Rul. 2023-2.

An Intentionally Defective Grantor Trust (“IDGT”) is an estate planning tool commonly used for estate and gift tax planning. When assets are transferred to an IDGT, the transfer is typically a completed gift, for gift and estate tax purposes, but not for income tax purposes. A gift tax return is generally required to be filed to report the gift and any appreciation in the value of the transferred assets is not included in the gross taxable estate of the donor. However, the donor or the grantor trust owner is taxed on the income of the IDGT.

Section 1014 generally provides that the basis of assets transferred by bequest, devise, inheritance or other similar means to someone pursuant to the death of a decedent is the fair market value of the assets at the date of the decedent’s death.

In Rev. Rul. 2023-2, on April 17, 2023, the IRS determined that the basis “step-up” under section 1014 does not apply to assets gifted to an irrevocable grantor trust by completed gift in cases in which such assets are not included in the gross estate of the owner of the trust for federal estate tax purposes. In such cases, even though the grantor trust’s owner is liable for federal income tax on the trust’s income (such as in the case of an IDGT), the assets of the grantor trust are not considered as acquired or passed from a decedent by bequest, devise, inheritance, or otherwise within the meaning of section 1014(b), and therefore section 1014(a) does not apply.

For a detailed explanation of how this development in the law affects your current estate plan or to set up a meeting to review your current estate plan against these changes in the law, you can call Esther A. Streete at 410-266-9909.