No basis step-up for grantor trust assets if not in grantor’s estate

If the assets of an irrevocable grantor trust are not included in grantor’s gross estate upon his or her death, those assets do not get a Sec. 1014 basis step-up, the IRS clarified Wednesday in Rev. Rul. 2023-2. The IRS had signaled this guidance was coming in November 2022, when the issue was included in the priority guidance plan for 2023.

In such cases, 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), and are not considered to have been acquired from or to have passed from the decedent under Sec. 1014(a). This means that the step-up basis in Sec. 1014(a), which generally applies the fair market value at the time someone dies to property that a taxpayer receives from the decedent, does not apply.

In its ruling, the IRS provided a fact pattern and concluded: “For property to receive a basis adjustment under § 1014(a), the property must be acquired or passed from a decedent. For property to be acquired or passed from a decedent for purposes of § 1014(a), it must fall within one of the seven types of property listed in § 1014(b). [The asset in the fact pattern, funding an irrevocable trust] does not fall within any of the seven types of property listed in § 1014(b).”

The types of property in Sec. 1014(b) include (among others) 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; and property that is a spouse’s one-half share in community property.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.