No Stepped-Up Basis Required for Trust Assets, IRS Rules

No Stepped-Up Basis Required for Trust Assets, IRS Rules

Internal Revenue Service

The IRS has ruled (Rev. Rul. 2023-2) that no adjustment is necessary under <a href="/research/federal/usc26/1014" resolve="/lr/resolve//cnyw">section 1014</a> to the basis of trust assets upon the death of an individual who is the owner of the trust under chapter 1 if the trust assets are not includable in his gross estate under chapter 11. The individual established an irrevocable trust and funded it with assets in a transfer that was a completed gift for gift tax purposes. The individual retained a power over the trust that caused him to be treated as its owner for income tax purposes. However, the individual did not hold a power over the trust that would result in the inclusion of the trust’s assets in his gross estate. By the date of his death, the fair market value of the asset had appreciated. At that time, the trust liabilities did not exceed the basis of the trust assets and neither the individual nor the trust held a note on which the other was the obligor. <a href="/research/federal/usc26/1014#cnyw-0000003" resolve="/lr/resolve//cnyw#cnyw-0000003">Section 1014(a)(1)</a> generally provides that, except as otherwise indicated in <a href="/research/federal/usc26/1014" resolve="/lr/resolve//cnyw">section 1014</a>, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent, if not sold, exchanged, or otherwise disposed of before the decedent’s death by that person, is the FMV of the property at the date of the decedent’s death. <a href="/research/federal/usc26/1014#cnyw-0000007" resolve="/lr/resolve//cnyw#cnyw-0000007">Section 1014(b)</a> lists seven types of property that are considered to have been acquired from or to have passed from the decedent for purposes of <a href="/research/federal/usc26/1014#cnyw-0000002" resolve="/lr/resolve//cnyw#cnyw-0000002">section 1014(a)</a>. The IRS explained that for property to receive a stepped-up basis under <a href="/research/federal/usc26/1014#cnyw-0000002" resolve="/lr/resolve//cnyw#cnyw-0000002">section 1014(a)</a>, it must be acquired or passed from a decedent, and for it to be acquired or passed from a decedent for purposes of the statute, it must fall within one of the seven types of property listed in <a href="/research/federal/usc26/1014#cnyw-0000007" resolve="/lr/resolve//cnyw#cnyw-0000007">section 1014(b)</a>. The IRS found that the assets do not fall within any of those categories and explained its reasoning for why they did not qualify under any of them. The IRS ruled that on the individual’s death, the assets were not bequeathed, devised, or inherited within the meaning of <a href="/research/federal/usc26/1014#cnyw-0000008" resolve="/lr/resolve//cnyw#cnyw-0000008">section 1014(b)(1)</a>. The agency defined each of those terms in the context of the statute and noted that the congressional committee report explaining the basis of property acquired from a decedent stated that the provision “applies basically to property in the decedent’s probate estate and includable in his gross estate. . . . In addition, it applies to property acquired by certain specifically described methods of disposition which are treated as though the acquisition was by bequest, devise, or inheritance.” According to the IRS, if the individual funds the trust with assets in a transaction that is a completed gift for gift tax purposes, the basis of the assets are not adjusted to the FMV on the date of his death under <a href="/research/federal/usc26/1014" resolve="/lr/resolve//cnyw">section 1014</a> because they were not acquired or passed from a decedent as defined in <a href="/research/federal/usc26/1014#cnyw-0000007" resolve="/lr/resolve//cnyw#cnyw-0000007">section 1014(b)</a>. Therefore, under the facts of the revenue ruling, the IRS ruled that the basis of the assets immediately after the individual’s death is the same as their basis immediately before his death.

The IRS has ruled (Rev. Rul. 2023-2) that no adjustment is necessary under section 1014 to the basis of trust assets on the death of an individual who is the owner of the trust under chapter 1 if the trust assets are not includable in his gross estate under chapter 11.

The IRS has ruled (Rev. Rul. 2023-2) that no adjustment is necessary under section 1014 to the basis of trust assets upon the death of an individual who is the owner of the trust under chapter 1 if the trust assets are not includable in his gross estate under chapter 11. The individual established an irrevocable trust and funded it with assets in a transfer that was a completed gift for gift tax purposes. The individual retained a power over the trust that caused him to be treated as its owner for income tax purposes. However, the individual did not hold a power over the trust that would result in the inclusion of the trust’s assets in his gross estate. By the date of his death, the fair market value of the asset had appreciated. At that time, the trust liabilities did not exceed the basis of the trust assets and neither the individual nor the trust held a note on which the other was the obligor. Section 1014(a)(1) generally provides that, except as otherwise indicated in section 1014, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent, if not sold, exchanged, or otherwise disposed of before the decedent’s death by that person, is the FMV of the property at the date of the decedent’s death. Section 1014(b) lists seven types of property that are considered to have been acquired from or to have passed from the decedent for purposes of section 1014(a). The IRS explained that for property to receive a stepped-up basis under section 1014(a), it must be acquired or passed from a decedent, and for it to be acquired or passed from a decedent for purposes of the statute, it must fall within one of the seven types of property listed in section 1014(b). The IRS found that the assets do not fall within any of those categories and explained its reasoning for why they did not qualify under any of them. The IRS ruled that on the individual’s death, the assets were not bequeathed, devised, or inherited within the meaning of section 1014(b)(1). The agency defined each of those terms in the context of the statute and noted that the congressional committee report explaining the basis of property acquired from a decedent stated that the provision “applies basically to property in the decedent’s probate estate and includable in his gross estate. . . . In addition, it applies to property acquired by certain specifically described methods of disposition which are treated as though the acquisition was by bequest, devise, or inheritance.” According to the IRS, if the individual funds the trust with assets in a transaction that is a completed gift for gift tax purposes, the basis of the assets are not adjusted to the FMV on the date of his death under section 1014 because they were not acquired or passed from a decedent as defined in section 1014(b). Therefore, under the facts of the revenue ruling, the IRS ruled that the basis of the assets immediately after the individual’s death is the same as their basis immediately before his death.

Sec. 1014 Basis of property acquired from a decedent

Sec. 1012 Basis of property--cost

Search Connectors

Retrieving Documents With a Tax Analysts’ Citation:

Field Restricted Searching:

No Stepped-Up Basis Required for Trust Assets, IRS Rules