Impact of IRS Revenue Ruling 2023-2 on Estate Planning and Irrevocable Trusts Explained

The Impact of Revenue Ruling 2023-2 on Estate Planning

Recently, the IRS released Revenue Ruling 2023-2, causing a significant shift in the landscape of estate planning, especially in cases involving irrevocable trusts. This ruling has sparked considerable interest and concern among families who rely on irrevocable trusts to safeguard their assets from spend-down in order to qualify for vital government benefits such as Medicaid and VA Aid and Attendance.

Clarity on Asset Treatment

Prior to the release of Revenue Ruling 2023-2, there was uncertainty surrounding the treatment of assets passing to beneficiaries through irrevocable trusts. Specifically, the question of whether these assets would receive a step-up in basis, eliminating potential capital gains taxes, remained unanswered. This ruling has provided much-needed clarity in this regard.

Historical Capital Gains Tax Implications

Assets disposed of during an individual’s lifetime historically attracted capital gains taxes based on the increase in their value over time. The calculation of the capital gains owed depended heavily on the variance between the asset's value at the time of purchase and its value at the time of transfer.