Since the IRS put Ruling 2023-2 into effect last spring, many people are wondering about the usefulness of irrevocable trusts. When set up correctly, irrevocable trusts can be very useful in the preservation and distributing of wealth. Because an irrevocable trust removes assets from a grantor’s taxable estate, an individual needing nursing home care would be eligible to receive government benefits. An irrevocable trust would allow the grantor, or creator of the trust, to set guidelines for distribution to ensure wishes were followed. The trust would also allow the grantor to gift assets while retaining income from the assets. Irrevocable trusts are a useful tool in estate planning but the latest IRS rule change impacts how capital gains tax are estimated.
Simply put, prior to the rule change, the IRS allowed for the step-up basis to reduce the tax liability of any unrealized capital gains and now they don’t. Before Ruling 2023-2, if you inherited a home that was purchased for $180,000 but the current value is $400,000, the step-up basis for capital gains tax purposes would be $220,000. Now there is no step-up basis so the capital gains tax would be based on the value of the home when it is sold.
For a better understanding of the usefulness of irrevocable trusts, contact Alloy Wealth Management to speak with one of our fiduciary financial planners. 800-689-3935