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Latest legal news and recent law changes.

Step-up or Step-out: An Asset’s Choice

The IRS regularly makes rulings on situations that taxpayers face, and then publishes those rulings to give guidance to other taxpayers to follow when they find themselves facing similar situations. The recently published Revenue Ruling 2023-02 gives helpful guidance for estate planning. This ruling found that property “acquired from or to have passed from the decedent” usually has its fair market value as its adjusted basis. (IRC § 1014). This phenomenon is known as “step-up basis.” This rule is quite favorable for taxpayers, in fact at nearly $44 billion per year, it is one of the most significant tax expenditures the federal government engages in. A tax expenditure is an amount of money that the federal government forbears through favorable treatment in the tax code.  

Revenue Ruling 2023-02 evaluated the possibility of a step-up basis for a trust with the following characteristics:

  • The grantor is taxed on the trust’s income.
  • The transfer to the trust was a completed gift.
  • The trust is irrevocable.
  • The trust’s assets would not be included in the grantor’s estate.
  • The trust’s assets are appreciated.
  • The trust’s liabilities did not exceed the basis of trust assets.
  • Neither the trust nor the grantor held a note obliging the other.

The ruling held that the trust’s assets would not benefit from a step-up basis. The fact that the gift was completed disqualified it from § 1014 treatment, §1014 being the section that defines what will qualify for a step up in basis by listing several sets of circumstances that qualify by being “acquired from or to have passed from the decedent.” The only applicable one for this type of trust is the most general: “Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent.” Ultimately, Revenue Ruling 2023-02 held that assets must be included in the estate for estate tax purposes to qualify for this clause.

Assets spared from the estate tax burden usually do not enjoy the benefits of a step-up basis and Revenue Ruling 2023-02 strengthened this general rule of estate planning even further.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email for a consultation.