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  • Writer's pictureHoyt, Filippetti & Malaghan, LLC

IRS Denies Basis Step-up for Assets of Irrevocable Grantor Trust Not Included in Grantor’s Estate

The IRS on March 29 released Rev. Rul. 2023-2, which confirms that the assets of an irrevocable grantor trust not includable in the grantor’s gross estate do not receive a basis adjustment under Internal Revenue Code Section 1014.

In the revenue ruling’s fact pattern, individual A established an irrevocable trust in which A transferred assets to the trust, making a completed gift for gift tax purposes. A retained a grantor trust power, pursuant to Sections 671-678, which caused A to be treated as the owner of the trust for income tax purposes. The retained grantor trust power did not cause the trust assets to be includable in A’s gross estate.

In general, property acquired or passed from the decedent receives a basis adjustment equal to the property’s fair market value at the date of the decedent’s death under Section 1014(a)(1). The ruling delineates the seven types of property, described in Section 1014(b), that would be considered to have been acquired from or to have passed from the decedent for purposes of a basis adjustment.

The ruling concludes that, at A’s death, the trust assets did not fall within any of the seven types of property described in Section 1014(b). Therefore, the trust assets would not receive a basis adjustment under Section 1014(a) and, immediately after A’s death, the basis of the trust assets would be the same basis they had immediately before A’s death.

The IRS specifically clarifies that this ruling does not change the result in Rev. Rul. 84-139, in which property acquired from a nonresident, non-citizen decedent that is not included in the decedent’s U.S. gross estate may receive a basis adjustment under Section 1014, if the property is acquired by bequest, devise or inheritance within the meaning of Section 1014(b)(1) or is otherwise specifically described in Section 1014(b).

The IRS went out of its way in the fact pattern to state that, at A’s death, trust debt did not exceed the basis of trust assets, nor did A or the trust hold a note on which the other was the obligor. If the situation were different, might the IRS deem debt in excess of basis a sale or exchange upon the death of A? A discussion for another time.

If you have questions, contact HFM today. Our professionals are well versed on the latest issues to provide our clients with professional, personalized services.

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