Trusts have been foundational estate planning strategies for decades and are becoming more popular as economic shifts and the aging population highlight unique estate planning goals. An irrevocable trust is one practical estate planning strategy for excluding assets from an estate’s taxable value, safeguarding wealth and helping to meet asset threshold limits for government benefits like Medicaid.
The Tax Advisor details how the 2023-2 IRS tax rule has significantly impacted estate planning strategies, particularly irrevocable trusts. We look at this change and how it affects your estate planning strategy when passing your wealth to loved ones.
Why the IRS Rule 2023-2 Matters in Estate Planning
Capital gains taxes are the heart of the IRS Rule 2023-2 changes. Individuals pay taxes on the difference between an asset’s purchase price and a higher sell price as that asset’s value grows over time. The original purchase price is their cost basis or non-taxed value. Amounts over the cost basis are taxed as a capital gain. Assets include property, investments, cars and anything providing income or profit. If you create or update an estate plan, the IRS rule may change your estate planning or updates in 2024. Work with an experienced estate planning attorney to find the right type of trust for your goals and structure it accordingly.
How the IRS Rule has an Impact on Beneficiaries
The cost basis for an asset’s beneficiaries significantly impacts capital gains taxes once they sell. Capital gains from the deceased’s date of purchase will be much higher than fair market value on the date of death. An irrevocable trust typically gave heirs a break by calculating an inherited asset’s capital gains from the fair market value at the owner’s death. That tax break has changed.
The IRS issued Rule 2023-2 in early 2023, which impacts an inherited asset’s cost basis for capital gains taxes. The cost basis was calculated on the fair market value on the date of death but is based on the deceased’s date of purchase as of March 2023. Calculating taxes from the date of purchase is considered a “step-down,” meaning a lower cost base and higher capital gains. Conversely, the date of death means fair market value at a higher cost basis and less capital gains.
An Irrevocable Trust as an Estate Planning Strategy
The main differentiator with an irrevocable trust is its ability to exclude assets from an estate’s valuation. Atlanta residents who establish an irrevocable trust technically no longer own the assets when they are transferred to the trust. This type of trust is a strategy that helps older adults applying for Medicaid benefits meet maximum thresholds.
With the new IRS rule, assets in an irrevocable trust are not part of the owner’s taxable estate at their death and are not eligible for the fair market valuation when transferred to an heir. The 2023-2 rule doesn’t give an heir the higher cost basis or fair market value of the inherited asset. Once they sell that asset, capital gains taxes are calculated using the value when the deceased purchased it.
How IRS Rule 2023-2 has an Impact on Estate Planning Strategies
Georgia families increasingly use irrevocable trusts to safeguard assets from spend-down for government benefits, like Medicaid and VA Aid and Attendance.
Future considerations must include reevaluating how irrevocable trusts are structured to navigate the evolving tax landscape effectively. Planning strategies need to adapt to ensure that assets are protected, and taxes are minimized for the benefit of future generations.
Key IRS Rule 2023-2 and Irrevocable Trust Takeaways:
- Irrevocable trusts no longer receive a step-up in basis for assets not included in the taxable estate at death.
- Careful planning can still allow assets in irrevocable trusts to pass to beneficiaries tax-free.
- The IRS ruling requires irrevocable trusts to be structured appropriately to avoid adverse tax consequences.
Conclusion
These tax implications raise important considerations for estate planning. While it may seem like irrevocable trust planning could lead to additional taxes for beneficiaries, the reality is more nuanced. Future considerations in estate planning involve setting up irrevocable trusts that align with new IRS rules. Any type of trust has complicated terms and requires the help of an experienced Atlanta estate planning attorney. Book a call with The Wooten Firm to ask about how the new IRS Rule could impact your estate plan or create a new plan that helps to minimize taxes for you and your heirs.
Reference: The Tax Advisor (Nov. 1, 2023) “Rev. Rul. 2023-2’s Impact on Estate Plans.”