Be Aware of This Estate-Planning Change

When property, like the family home or other appreciated assets, passes at your death, do you want to saddle your beneficiaries with capital gains tax? You may do just that if you pass your home through an irrevocable trust.

BACKGROUND

Generally, the appreciation in assets sold or disposed of during your lifetime is subject to capital gains tax. There’s an exception for property passing at your death to your beneficiaries. They’ll generally receive the property at a “stepped-up” value equal to the current fair market value. Thus, capital gains tax is eliminated on appreciation realized during your lifetime. In the past, appreciated property in irrevocable trusts generally has received this favorable treatment.

Recently, though, the IRS has questioned this treatment for property passed to beneficiaries through an irrevocable trust. The IRS’s grounds are that once property is placed in an irrevocable trust, the person who placed it there no longer owns it. Nor does ownership shift to the trust beneficiaries. And in most cases, the property isn’t included in a person’s estate for estate tax purposes.

WHAT’S DIFFERENT NOW?

A 2023 IRS Revenue Ruling* clarifies that property in an irrevocable trust that is not includable in your taxable estate at death will no longer receive a stepped-up basis. While the ruling may sound like a death knell for certain estate-planning strategies, it doesn’t have to be. An irrevocable trust can be constructed to include assets in your taxable estate, allowing your beneficiaries to receive a stepped-up basis.

BOTTOM LINE

Most families don’t have estates large enough to be subject to estate taxes, even with the inclusion of the family home’s value. So, chances are that you can still pass your home to your heirs without estate- and capital-gain tax liability.

Estate and capital-gains taxation and planning with trusts are complex processes, so work with your legal, tax and financial professionals to ensure the documents are drafted properly.

*IRS Revenue Ruling 2023-2