In April the IRS issued Revenue Ruling 2023-2, denying a basis adjustment under Section 1014 for property acquired from a decedent that was held in an irrevocable non-grantor trust when the grantor died.
Grantor trusts provided many benefits to families, but are “grantor” trusts, meaning they are not treated by the IRS as separate taxpayers from the grantor while the grantor is alive.
But there are two types of grantor trusts. First, grantor trusts where the property owned is included in the grantor’s estate for estate tax purposes (“traditional grantor trusts”); and “irrevocable” grantor trusts, where the grantor permanently gives the property away in trust, but retains a power (such as the power to substitute assets of equal value) which the IRS treats as controlling, and thus income earned on trust assets is taxed to the grantor (sometimes known as “intentionally defective” grantor trusts or an “IDGT”).
When this technique became common, practitioners could not say if the IRS would allow the assets in the second type of trust to receive a “step up” to fair market value when the grantor died. This ruling finds that, UNDER THE FACTS OF THIS CASE, the assets would not receive a date of death step up.
Here, the grantor funded the IDGT and died after the trust assets appreciated. The liabilities of the trust did not exceed the basis of the assets at the date of the decedent’s death and neither the trust nor the grantor held a note on which the other was an obligor. Under these facts, the IRS did not allow the step up.
The ruling reviews the applicable statutes and case law and concludes that since the property in the trust would not be considered as having been acquired or passed from a decedent under Section 1014(a), or fall within any of the additional types of property listed in section 1014(b), there would be no basis adjustment under Section 1014 for the assets held in the trust. The ruling is limited in coverage factually to situations where the liabilities of the trust do not exceed the basis of the asset at the date of the decedent’s death and neither the trust nor the grantor held a note on which the other was an obligor.
Although not stated in the ruling, in the absence of the date of death step up under section 1014(a), the general rule of Section 1015 would apply: the giftee/donee has a carryover basis equal to the donor’s basis.
MWR
10/2023
