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A new IRS ruling could affect your children’s inheritance

Posted By Lineweaver Financial Group
July 26, 2023 Category: General, IRS, Inheritance, Trust, Estate Planning

In a major shift, a new IRS ruling has tightened the regulations surrounding irrevocable trusts and the step-up basis. In the past, families have been utilizing irrevocable trusts to protect their assets from spend-down to still qualify for benefits like Medicaid and VA Aid. Also during this time, it was not clear if assets passing to beneficiaries through an irrevocable trust would receive a step-up in basis, which eliminated any capital gains taxes that would otherwise be owed.  Historically, assets that individuals sold or transferred during their lifetime have been taxed as capital gains, based on the appreciation in value that occurred over time. The capital gains owed are predominantly calculated by comparing the asset's value at the time of purchase with its value at the time of transfer. An exception to the obligation of capital gains taxes comes when the owner of the assets dies, and the assets pass to their beneficiaries. The beneficiaries receive a step-up in basis, therefore they inherit the assets as if it had been purchased at the current fair market value instead of the value of the assets at the original time of purchase. This eliminates any capital gains, and no taxes become due. The new IRS ruling has tightened the regulations surrounding irrevocable trusts and the step-up in basis. According to the updated guidelines, assets held within certain irrevocable trusts will no longer receive the benefit of a step-up in basis upon the grantor's