Navigating the New IRS Revenue Rule on Inheritance Taxes

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The recent IRS Revenue Ruling 2023-2 has introduced a profound shift in the tax landscape surrounding irrevocable trusts, rendering previously favored strategies somewhat less tenable. For the affluent residents of Las Vegas, these nuances carry particular weight. According to the article “IRS quietly changes rule on how your children’s inheritance is taxed” from The Daily Mail, the agency has clarified how irrevocable trusts are taxed.

Historical Ambiguity: Before Revenue Ruling 2023-2

Historically, it has been somewhat nebulous regarding the tax policies surrounding assets passed onto beneficiaries through an irrevocable trust. Assets that are distributed during a benefactor’s lifetime typically experience capital gains taxes based on the asset’s increase in value over time. The tax is determined largely by the difference between how much the asset was worth when it was purchased and the value at the time it was transferred.

Yet, there existed a notable exception: assets transferred to beneficiaries upon the death of the owner. Such transfers benefited from the “step-up in basis,” under Section 1014 of the Code upon the death of the grantor, effectively allowing the beneficiary to inherit the asset as if they had acquired it at its current market value. This unique provision would eliminate any capital gains taxes.

Consider this situation: An affluent married couple purchased a home in 1975 for $100,000. Fast forward to 2023, and this once-modest investment now has a market value of $2.5 million (or perhaps even more given Las Vegas’ booming real estate market).  If they want to sell the home, the couple will owe capital gains on the $2.4 million increase in value. Before the ruling, if they transferred their home into an irrevocable trust, the trust could sell the home from a cost basis of $2.5 million, and there would be no capital gains due if the proceeds were distributed to their children.

The Turning Tide: Post Revenue Ruling 2023-2

As per the IRS Revenue Ruling 2023-2, properties resting in irrevocable trusts, if not included in the taxable estate upon the owner’s death, will no longer benefit from the step-up basis privilege. This does not, in any way, signify the diminishing importance of trusts. Rather, it underscores the necessity of meticulous planning under the guidance of a seasoned estate planning attorney like S. Craig Stone II.

Las Vegas estate tax planning for affluent residents now must consider the new rule to avoid substantial costs to heirs. It is now critical to be sure any trust included in the taxable estate at death uses correct wording, so the value of the assets is included in the taxable estate.

For many, the immediate implications of this ruling might seem distant. Even with the inclusion of their Las Vegas home’s present-day value, the majority of families remain insulated from the federal estate tax, which is only applicable to estates valued at $12.92 million or more. However, in 2026 the estate tax limit will be lowered to about half that amount.

For more Las Vegas estate tax planning changes to consider, read our article, Will Proposed Tax Hikes Have an Impact on My Estate Planning?

By working with Estate Planning Attorney S. Craig Stone II, Las Vegas affluent residents can ensure that they continue to preserve and pass on their wealth to their chosen heirs with minimal taxes. Request a consultation with Stone Law Offices to get started.