IRS Quietly Changes Rule That Could Impact Your Children's Inheritance
A financial strategy used by wealthy taxpayers to pass their assets on to their children, instead of throwing them in the lap of a nursing home has now become potentially less attractive.
The Internal Revenue Service in March published Revenue Ruling 2023-2, which Kiplinger said has a “substantial impact on estate planning, particularly where an irrevocable trust is involved.”
The site noted that as Americans age, they often spend their final years in a long-term care home or other facility and rely upon funding from Medicaid or another government program to pay the costs of that care.
Most states have rules that say individuals must spend down the wealth they have amassed over their lives as a condition of getting Medicaid or another government-funded program to pay the bills.
Our governments deep love for our money.
IRS Quietly Changed the Rules on Your Children’s Inheritance
Property, such as your home, held in an irrevocable trust ‘that is not included in the taxable estate at death’ will no longer receive a step-up in basis.— Jeffersonian (@RonaldVolusus) July 6, 2023
That means that money or the value of a home an American wanted to go to a child is gone, leading Americans to set up what are called irrevocable trusts to pass their assets along to the people to whom they want them to go.
The new IRS ruling is aimed at those trusts.
In breaking down tax-speak into layman’s language, the U.K. Daily Mail explained that a second purpose of an irrevocable trust is to avoid estate taxes.
The way it works is that an individual puts assets into the trust, such as a house. If a homeowner who bought a house for $150,000 dies and it sells for $300,000, there is a tax on that capital gain of $150,000.
But if the house was put into an irrevocable trust, there is no capital gains tax because of a bit of bureaucratic jargon called a “step-up in basis.” The English translation of that means that the trust, when it sells the house, pays no capital gains tax because, for tax purposes, it received the house at its current value.
That was the old days.
The new IRS ruling means that property in a trust that is not included in a person’s taxable estate no longer gets that “step-up in basis,” meaning capital gains taxes can be collected, according to Kiplinger.
“What does that mean? Essentially, in a move that is likely meant to make sure that as many estates as possible become subject to paying estate taxes, if you establish an irrevocable trust that is not set up properly, you will lose the step-up in basis,” Kiplinger wrote.
“If you currently have an irrevocable trust or are considering one, seek advice from a financial planner.”
IRS Quietly Changes Rule on How Your Children’s Inheritance Is Taxed – https://t.co/r4dome3wv8
— Kathy (@KMR1950) July 6, 2023
The site noted that federal estate taxes currently kick in for estates valued at $12.92 million or higher, a level that will fall in 2026 to what Kiplinger estimated will be about half of that.
Reuters noted that the ruling is not the end of the line. As with all battles of wits between the IRS, which tries to get everything it can, and financial planners, who try to protect the assets of their customers, each new move by the IRS produces a counter-move estate planners can try.
The full ruling is available on the IRS website.
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