IRS Issues Revenue Ruling Holding that Assets Held in an Irrevocable Grantor Trust Do Not Receive a Step-Up in Basis at Death

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In a recently-issued Revenue Ruling (Rev Rul 2023-02), the IRS has held that the basis of the assets in an irrevocable grantor trust, where the assets are not included in the grantor’s gross estate for federal estate tax purposes, is not adjusted to fair market value upon the grantor’s death.

According to the ruling: Code §1014(a)(1) provides that the basis of property in the hands of a person acquiring the property from a decedent generally is the fair market value of the property at the date of the decedent’s death. Code §1014(b) lists seven types of property that are considered to have been acquired from or to have passed from the decedent for this purpose, and finds that the list is exclusive, relying on Collins, 318 F Supp 382 (DC CA 1970). The assets in the trust do not qualify as one of the seven types of property listed. Accordingly, the basis of the trust assets immediately after the grantor’s death is the same as the basis immediately prior to the grantor’s death.

A Revenue Ruling is an administrative pronouncement by the IRS, and can be relied on by taxpayers. But Revenue Rulings are not binding on courts, and do not have the force of law or the authoritative weight of regulations. On the other hand, a Revenue Ruling reflects the government’s position and may be given deference, especially if the reasoning in the ruling is persuasive. 

There has been some debate on this particular issue in recent years. It is the author’s opinion, however, that most practitioners already were treating assets held in an irrevocable grantor trust as not receiving a step-up in income tax basis upon the grantor’s death, which is consistent with the new Revenue Ruling provides.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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