IRS Issues Revenue Ruling Holding that Assets Held in an Irrevocable Grantor Trust Do Not Receive a Step-Up in Basis at Death

In a recently-issued Revenue Ruling (Rev Rul 2023-02), the IRS has held that the basis of the assets in an irrevocable grantor trust, where the assets are not included in the grantor’s gross estate for federal estate tax purposes, is not adjusted to fair market value upon the grantor’s death.

According to the ruling: Code §1014(a)(1) provides that the basis of property in the hands of a person acquiring the property from a decedent generally is the fair market value of the property at the date of the decedent’s death. Code §1014(b) lists seven types of property that are considered to have been acquired from or to have passed from the decedent for this purpose, and finds that the list is exclusive, relying on Collins, 318 F Supp 382 (DC CA 1970). The assets in the trust do not qualify as one of the seven types of property listed. Accordingly, the basis of the trust assets immediately after the grantor’s death is the same as the basis immediately prior to the grantor’s death.

A Revenue Ruling is an administrative pronouncement by the IRS, and can be relied on by taxpayers. But Revenue Rulings are not binding on courts, and do not have the force of law or the authoritative weight of regulations. On the other hand, a Revenue Ruling reflects the government’s position and may be given deference, especially if the reasoning in the ruling is persuasive. 

There has been some debate on this particular issue in recent years. It is the author’s opinion, however, that most practitioners already were treating assets held in an irrevocable grantor trust as not receiving a step-up in income tax basis upon the grantor’s death, which is consistent with the new Revenue Ruling provides.