How Does Grantor Trust Status Have an Impact on Step-Up in Basis and Estate Tax Exclusion?- If you’re considering establishing an irrevocable trust as part of your estate plan, you’ll want to understand how the trust will affect your capital gains taxes and estate tax exclusions. According to a recent article, “This Double-Dip Trust Benefit Really Is Too Good to Be True,” from Kiplinger, there is no double dip. Here’s why.
An irrevocable trust could be considered a grantor trust, meaning the person who made the trust will be regarded as the owner of the trust’s income or principal. The grantor will include trust income, deductions and credits on their own personal taxes, despite the trust not distributing the income to the grantor and the income remaining within the trust. Taxes for personal income are usually lower than trust tax rates, which is one of many reasons to use grantor trusts.
The IRS issued Revenue Ruling 2023-02 in early 2023 as a clarification. Suppose that assets in an irrevocable trust are excluded from the grantor’s gross estate. In that case, estate-excluded assets do not get a step up in basis for capital gains tax under Internal Revenue Code Section 1014, even if the grantor was paying income taxes on the trust income as described above.
The ruling was intended to clarify the confusion surrounding different tax rules: income tax rules, capital gains tax rules and gift and estate tax rules. This wasn’t really a big change; it was just a much-needed clarification
Experienced estate planning attorneys already knew the rule: property transferred to an irrevocable trust under a completed gift doesn’t qualify for a step-up in basis for capital gains tax savings, even if the grantor pays the taxes on the trust.
The people surprised by the ruling believed—wrongly—they could pay trust income taxes under the lower individual tax rates and exclude property from their gross taxable estate, while also gaining a step-up in basis on capital gains taxes.
Using the trust as a grantor so the trust maker pays the trust taxes has never been a valid means of stepping up the basis in completed-gift trust assets outside of the grantor’s gross estate.
Creating a solid estate plan using acceptable strategies with an experienced estate planning attorney will prevent future tax issues for the estate and heirs, which are far more expensive than doing it right the first time.
Schedule your phone consultation: THE LAW OFFICES OF CLAUDE S. SMITH, III
How Does Grantor Trust Status Have an Impact on Step-Up in Basis and Estate Tax Exclusion?
Reference: Kiplinger (Sept. 15, 2024) “This Double-Dip Trust Benefit Really Is Too Good to Be True”
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