Irrevocable trusts are estate planning strategies that many residents of Maryland use to reduce their taxes and pass on more of their estates. The IRS rolled out Revenue Ruling 2023-2 in March 2023 to change some of the rules surrounding irrevocable trusts, which could mean that you might owe more taxes.
Clarity on rules for step-up
Before Revenue Ruling 2023-2, it wasn’t clear how the IRS sees capital gains taxes for irrevocable trusts. Beneficiaries didn’t have to pay capital gains taxes when they received assets after the testator’s death. Irrevocable trusts typically followed a step-up basis too, although there weren’t specifications. Revenue Ruling 2023-2 declares that assets from an irrevocable trust don’t follow a step-up basis if they aren’t part of the taxable estate upon the grantor’s death.
Qualifying for step-up
Your irrevocable trust can qualify for step-up benefits if your estate doesn’t meet the benchmark for paying estate taxes. Certain estate planning strategies might help you avoid or reduce taxes. You could write in your estate plan that the increase in value of its assets are part of the estate. This would mean that your beneficiaries don’t have to pay capital gains taxes on the irrevocable trust’s assets.
If you deposited assets into an irrevocable trust before Revenue Ruling 2023-2, you could sell the asset to qualify for the step-up basis. Your beneficiaries wouldn’t owe capital gains taxes when you die.
It’s important to know that the federal government is cutting the estate tax limit in half in 2026. Before 2026, estates of around $12.92 million or more must pay taxes. You might want to revisit your estate plan to prepare for the far lower limit.
Revisiting your estate plan annually helps you stay on top of changes that might affect your strategy. Changes in March 2023 have adjusted the rules for irrevocable trusts, and by 2026, the estate tax limit will be lower.