Sarah was distraught as she sorted through her mother’s paperwork after her passing. She knew her mother’s estate held significant assets that had appreciated greatly over the decades. However, to Sarah’s dismay, she discovered most assets were held in an Irrevocable Trust her mother had established years prior.
As Sarah met with the family estate plan attorney to discuss inheritance, a question weighed heavily on her mind: do irrevocable trusts get a step-up in basis at death in New York? She worried that without a step-up, having to pay capital gains taxes on decades of appreciation could drastically reduce what was passed on to help support her family. The attorney understood Sarah’s concern. Estate planning seeks to provide for loved ones, not create an additional burden during an already difficult time.
In this blog, an estate plan attorney on the East End of Long Island explores the tax treatment of Irrevocable Trusts at death under New York legislation. While the rules may not always provide the outcome we hope for, understanding the tax implications can help us plan effectively for our loved ones. Continue reading to learn more, then contact us at (631) 506-8440 to schedule a consultation in Riverhead, NY.
Understanding the Step-Up in Basis Concept
To understand whether Irrevocable Trusts receive a step-up in basis at death, it’s helpful to first explain the step-up concept. The federal tax basis of an asset is generally the price paid for the asset, subject to certain adjustments over time. When the asset is sold, any difference between the sale price and adjusted basis is realized as a capital gain or loss.
At death, the tax code provides inheritors a crucial tax break through the step-up in basis. This means assets inherited from a deceased person receive a step-up, or adjustment, in basis to the fair market value on the date of death. For example, if stock was purchased for $10,000 years ago but is now worth $100,000 when the original owner passes, the inheritor’s basis in the stock becomes the $100,000 FMV (fair market value). Simply put, the stock is treated as if it were worth $100,000 at the time of the original purchase.
This is significant because it potentially eliminates capital gains tax owed on decades of appreciation that occurred during the decedent’s lifetime. But the million dollar question remains — do irrevocable trusts get a step-up in basis at death?
Introduction to Irrevocable Trusts in New York
An Irrevocable Trust is a permanent legal agreement where the grantor transfers assets to trustee(s) to be held for the benefit of specified individuals, known as beneficiaries. Once assets are transferred to the Trust, the grantor loses control and cannot change the terms of the trust.
There are several reasons why individuals establish Irrevocable Trusts in New York. First, Irrevocable Trusts help remove assets from the grantor’s taxable estate, which can provide estate tax savings upon the grantor’s death since assets in the Trust avoid potential estate taxes. Irrevocable trusts are also often used for Medicaid planning, allowing individuals to gift assets out of their name without penalty while still providing for their care.
However, by giving up control of the Trust assets, the grantor also loses certain tax benefits. One important tax benefit lost is the step-up in basis. Normally, when a person passes away, assets they own like stocks and real estate receive a step-up in basis to the fair market value on the date of death. This means heirs can sell the assets without owing capital gains taxes on any appreciation that occurred while the decedent held the assets.
Examining IRS Rulings and New York State Laws on Step-Up in Basis for Irrevocable Trusts
A recent IRS revenue ruling has caused understandable confusion for many people whose estate plans include one or more trusts. Revenue Ruling 2023-2, issued in March 2023, states that for assets conveyed to an Irrevocable Grantor Trust, there is no “step-up” in tax basis at the grantor’s death.
For grantors and beneficiaries of an Irrevocable Trust, the ruling raises onerous tax consequences, which we will discuss below. However, the ruling only applies to Irrevocable Grantor Trusts. For Revocable or “Living” Trusts, the step-up in basis still applies per the IRS, so no reviews or revisions are needed for those legal documents.
New York tax law also follows the IRS’s position that assets in an Irrevocable Trust do not receive a step-up at the grantor’s death. Unless exceptions apply, the basis remains the same as when assets were originally gifted or sold to the Trust. This means capital gains taxes may be owed later if Trust assets are sold based on appreciation since the original purchase.
Given this IRS ruling, consulting an estate plan attorney is a wise decision. An experienced lawyer can help determine strategies to minimize future capital gains tax impact.
Planning Considerations for Irrevocable Trusts to Maximize Tax Benefits in New York
Due to the IRS ruling and state laws, individuals with Irrevocable Trusts should consult trust attorneys who can devise strategies for maximizing remaining tax benefits. Some options estate planning attorneys on the East End of Long Island may suggest include:
- Revisiting the trust document before death to allow certain appreciated assets to receive a step-up. However, this requires careful drafting to avoid revocation of the trust’s benefits.
- Strategically timing the sale of highly-appreciated trust assets before death to “lock in” gains at long-term capital gains rates while the grantor is alive.
- Including protective provisions allowing trustees to distribute appreciated assets to beneficiaries outright before required gain recognition events.
- Utilizing the exclusion amount each year to make tax-free gifts to trust beneficiaries who could then sell assets receiving a step-up in basis.
By working with knowledgeable and experienced trust attorneys, grantors and trustees can explore customized planning solutions tailored to the individual Trust and family circumstances. With the proper revisions and ongoing management, Irrevocable Trusts may still largely achieve their goals of transferring wealth while minimizing taxes owed over time.
Sheryll Law, P.C.: Estate Planning and Asset Protection Attorney on the East End of Long Island
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At Sheryll Law, P.C., our skilled trust attorneys customize ownership structures and plans to best fit your specific needs. Whether you need a new Trust, guidance on ownership entities, assistance with insurance policy selection, or updates to an existing estate plan, our team provides knowledgeable and experienced support. We prioritize gaining a comprehensive understanding of your unique circumstances, future aspirations, and risk tolerance, enabling us to create personalized solutions that instill confidence.
Let us be your legal guide in comprehensively safeguarding the wealth and legacy you’ve built. Contact us at (631) 506-8440 or complete our online form to schedule a consultation.
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The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.
Sheryll Law, P.C.
633 East Main Street, Suite 2
Riverhead, New York 11901
(631) 506-8440
https://sheryll-law.com/
