By Herman S. Chatrath
In March 2023, the Internal Revenue Service (“IRS”) issued Revenue Ruling 2023-2, definitively stating that assets in irrevocable grantor trusts do not receive a step-up in basis (i.e., an adjustment of the value of an asset) when the grantor dies. This ruling clarifies a previously ambiguous area of tax law and carries significant implications for estate planning strategies. This article will examine IRS Revenue Ruling 2023-2 and the impact it will have on estate planning.
Understanding Trust Options
Most clients are familiar with revocable trusts, as they represent the majority of family trusts created each year. These arrangements allow the trustor to modify or cancel the trust during their lifetime. An irrevocable trust, in contrast, represents a legal arrangement where the grantor permanently transfers assets into the trust, relinquishing ownership and control. Once established, the terms generally cannot be reversed without beneficiary consent or court approval.
When considering whether an irrevocable trust might be appropriate, clients should understand key aspects of these arrangements:
- Asset protection benefits that shield property from creditors and legal judgments;
- Potential estate tax reduction by removing assets from the grantor’s taxable estate;
- Permanent transfer of control that limits the grantor’s ability to modify the arrangement; and,
- Complex tax treatment that requires careful planning and expert guidance
The Step-Up in Basis: A Valuable Tax Benefit
A step-up in basis is a valuable tax provision that adjusts the value of an inherited asset to its fair market value at the time of the owner’s death. It sets the value of the asset as of the time of the grantor’s death instead of its value on the date of acquisition. This adjustment can significantly reduce capital gains taxes when beneficiaries eventually sell the asset. Prior to this ruling, uncertainty existed regarding whether assets in irrevocable grantor trusts received this beneficial treatment.
Implications of Revenue Ruling 2023-2
The IRS has now clarified that assets in these trusts maintain their original cost basis rather than receiving a step-up when the grantor dies. Consequently, beneficiaries will likely face higher capital gains taxes when selling these assets in the future. This effectively eliminates what was previously considered a potential tax advantage of holding appreciated assets in these trusts until death.
Reassessing Estate Planning Strategies
This development necessitates a reconsideration of estate planning strategies that relied on irrevocable grantor trusts for tax efficiency. Clients who implemented such arrangements with the expectation of a basis step-up may need to explore alternative approaches to achieve their financial and legacy objectives.
The transactions department at Coleman & Horowitt, LLP represents clients in business entity formation, corporate governance, dissolution and winding up of business entities, mergers and acquisitions, stock sales, asset purchase agreements, business and succession planning and general counsel to business entities. If you have any questions about this article or our services, contact the author, Herman S. Chatrath, or Michael P. Dowling, head of the transactions department, at (559) 248-4820 or [email protected] or [email protected].
© Coleman & Horowitt, LLP, 2025
About the Author:
Herman S. Chatrath is an attorney in Coleman & Horowitt’s Fresno office, where he represents companies and their owners in business, real estate, construction, and estate planning matters. A graduate of Loyola Law School, Herman brings a strong background in commercial real estate, having managed large portfolios of apartment and office buildings, as well as overseeing non-performing loans for a private real estate company with assets over $4 billion. During law school, he excelled in Moot Court, achieving a top-ten brief placement, and served on the Transaction Negotiation team, where he successfully negotiated the mock acquisition of an $800 million company. He can be reached at (559) 248-4820 or [email protected].
About the Firm:
Established in 1994, Coleman & Horowitt, LLP is a state-wide law firm focused on delivering responsive and value-driven service and preventive law. The Firm represents businesses and their owners in matters involving transactions, litigation, agriculture & environmental regulation and litigation, intellectual property, real estate, estate planning and probate. Attorneys at the firm also serve as mediators, arbitrators, and discovery referees. The Firm has been recognized as a “Preeminent Law Firm” by Martindale Hubbell, a “Go-To” Law Firm (Corporate Counsel) and listed in the Chambers California Spotlight for commercial litigation (Fresno). From six offices in California, and the Firm’s membership in Primerus, a national and international society of highly rated law firms (www.primerus.com), the Firm has helped individuals and businesses solve their most difficult legal problems. For more information, see www.ch-law.com and www.Primerus.com.
Disclaimer: This article is intended to provide the reader with general information regarding current legal issues. It is not to be construed as specific legal advice or as a substitute for the need to seek competent legal advice on specific legal matters. This publication is not meant to serve as a solicitation of business. To the extent that this may be considered as advertising, then it is expressly identified as such.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with the requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.