Revenue Ruling 2023-2 | How it Impacts Irrevocable Trusts

It provides a clarification that could drastically alter how and when someone uses irrevocable trusts. Based on it, any assets transferred to the trust during your lifetime do not qualify for a step-up in basis when you die.

The justification for this ruling is that the assets were still controlled by you, the owner, during your lifetime. Upon the owner's death, those assets are not bequeathed (gifted), devised (gifted of real property), or inherited by the trust beneficiary because the irrevocable trust does not dissolve upon your passing.

The assets stay in the trust.

This ruling significantly alters estate planning strategies for HNWI and those with privately owned businesses. If you were solely relying on the step up in basis to reduce capital gains taxes for your heirs who will undoubtedly sell certain assets, that is no longer a viable method.

Whether you currently have an irrevocable trust or plan to set one up, this necessitates a rethinking of your estate planning strategies.

Managing the Implications of Rev Ruling 2023-2

You may feel concerned about this clarification and wonder if your current plan is still sound. However, know that you have options. CPAs experienced in estate planning for HNWI and owners of small to medium-sized businesses can help you navigate this, ensuring your irrevocable trust remains effective, according to your intentions.

The Future of Estate Planning with Irrevocable Trusts

Despite the challenges that this presents, these trusts still play a vital role in estate planning. The benefits go beyond step-up in basis.

They still have the following advantages:



• Reduce estate taxes
• Protect assets from creditors and during divorce
• Protect beneficiaries who are disabled
• Allow a person to qualify for long-term care, Medicaid, or Supplemental Security Income (SSI)
• Dictate how assets are used to benefit the beneficiaries, especially those who do not manage money well or need time to grow into a responsible adult

This ruling necessitates innovative planning combined with tried and true methods that still work. Flexible trust design will become essential. Note that keeping assets outside the irrevocable trust can increase your own income taxes, so it's vital to weigh the pros and cons of transferring various assets.

This could include more strategic inclusion of assets to maximize the benefits as well as tax planning to both reduce your tax bill and balance paying taxes now versus later.

If advantageous, assets can be removed from irrevocable trusts with the beneficiary's approval. Given that—after the ruling—it may be in their best interest to have assets more strategically transferred to the trust, they may give approval. However, this will impact your taxes once again.

You'll also want to make sure you're getting the most out of tax advantages for small businesses and medium alike. These could include outsourcing the CFO role at your company.

A review of your trust and overall estate plan and tax strategy should commence sooner rather than later to protect your heirs and assets during generational wealth transfer.

You've worked hard to build a business and grow your wealth. You want to leave a legacy and see your heirs continue to benefit from your savvy business, tax planning, compensation strategy, and investment decisions.

How Flynn & Company Can Help

Revenue ruling 2023-2 marks a historic shift in asset treatment. It will directly impact your estate planning and tax planning strategies. It highlights the intricate relationship among estate planning, business tax planning, and minimizing capital gains. This ruling presents challenges but also opportunities to continue to use estate tax law to your advantage with the right expert team around you. We're pretty good with numbers and can help you navigate revenue ruling 2023-2 and whatever comes next to meet your wealth transfer goals. Let's talk about your financial plan.