Skip to main content

Site Navigation

Site Search

global Tax

IRS Clarifies Step Up in Basis Rules for Grantor Trusts

May 08, 2023

The IRS has issued clarification regarding the step-up basis for irrevocable grantor trusts. Here’s what you need to know.

Do you have an irrevocable grantor trust? The IRS has clarified that if the assets of such trusts are not included in a grantor's gross estate upon his or her death, those assets do not get a Sec. 1014 basis step-up. We have the details here.

What is an irrevocable grantor trust?

An irrevocable trust is one where the terms cannot be altered, amended, or revoked. The grantor permanently gives up ownership of any assets transferred to the trust. A completed gift has occurred. Only in rare circumstances and with the express permission of all beneficiaries may a grantor change these terms.

Because the grantor has given up ownership of the assets, the property is no longer part of the grantor’s taxable estate. The grantor is liable for any income tax the assets might generate during her lifetime, because such trust is grantor status for income tax purposes. Still the assets are not included as part of the grantor’s taxable estate after the grantor’s death. Although technically a grantor may serve as a trustee of their irrevocable trust, most lawyers strongly advise against it because it could expose the grantor or estate to tax liability, defeating the primary benefit of the trust.

What is a step up in basis?

This is a readjustment of an appreciated asset’s cost basis upon inheritance.

What’s new?

Rev. Rul. 2023-2 clarifies that the step-up basis in Sec. 1014(a), which typically applies the fair market value at the date of death of the decedent to property that a taxpayer receives from the decedent, does not apply.

Even though, the grantor trust's owner is liable for federal income tax on the trust's income, the assets of the grantor trust are not considered as acquired or passed from a decedent by bequest, devise, inheritance, or otherwise within the meaning of Sec. 1014(b). Hence, these assets are not considered to have been acquired from or to have passed from the decedent under Sec. 1014(a).

Under the new ruling, for assets owned by an irrevocable trust, in order to receive a step up in basis, property must be acquired or passed from a decedent. It must fall within one of the seven types of property outlined in 1014(b).

What kinds of property are included under Section 1014b?

This includes:

  • Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent;
  • property held in a revocable trust;
  • property passing by a general power of appointment under a will;
  • property that is a spouse's one-half share in community property.
June CTA

Stay informed. Get all the latest news delivered straight to your inbox.

Also in Tax Blog

up arrow Scroll to Top