Do you employ an irrevocable trust or trusts as part of your estate plan? You need to review your irrevocable trust to ensure it still delivers the benefits intended. It is generally possible to modify an irrevocable trust, however, this requires expert guidance from an experienced tax and estate planning attorney.
Irrevocable trusts have been used in the past to protect assets as part of qualification for Medicaid, VA Aid and other government benefits. Irrevocable trusts used to allow the grantor (owner of the asset) to pass assets with a low “basis” (cost, specifically in terms of tax calculation) to heirs and beneficiaries upon one’s passing. When these assets are inherited the basis of the asset would “step up” to the present market value.
From a tax perspective, imagine the tax savings when the asset’s original cost was much lower than present-day value. In this example, the beneficiary, in effect, is able to avoid all of the tax on any capital gains between the original acquisition and the date of inheritance. This would save grantors and taxpayers a tremendous amount by reducing taxable capital gains on these assets in the future.
Last year, the IRS implemented a substantial change to the taxable basis for assets contained in an irrevocable trust. This significant development is why you need to review your irrevocable trust with an experienced estate planning and tax attorney. The new rule requires the taxable assets to be taxed as part of the estate of the original grantor, or else the basis in these assets remains the same as the date the asset was initially acquired.
If the assets in this example are a part of the grantor’s taxable estate and are passed to the heir or beneficiary post-tax the recipient receives the step-up basis to the present value of that asset. If the same assets were passed through an older irrevocable trust, the recipient would retain the existing basis for those assets, resulting in a much higher taxable capital gain when the assets are ultimately transacted.
The present estate tax exclusion is $13.61 million per individual, and $27.22 million for married couples. Therefore, in the vast majority of cases, it may not make sense to place the assets in an irrevocable trust. Under the recent IRS rule, 2023-2, the beneficiary or heir will pay more in taxes if the asset is passed through an irrevocable trust than if the grantor keeps those assets within their taxable estate.
Less than 3,000 estates in the United States in 2021 exceeded the estate tax exclusion and had to pay any income tax. In these cases, leaving the assets in some other form of trust or taxable entity would not create an additional tax burden. Most estates and their heirs and beneficiaries would benefit from an update to any estate plan deploying irrevocable trusts.
This is why you need to review your irrevocable trust and overall estate plan. It is prudent to review any estate plan regularly to ensure the intent of the grantor(s) is accomplished while providing asset protection and tax minimization.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.