On March 29, the Internal Revenue Service (IRS) released Rev. Rul. 2023-2, which affirms that the assets of an irrevocable grantor trust not includable in the grantor’s gross estate do not receive a basis adjustment under Internal Revenue Code Section 1014.
In the revenue ruling’s fact pattern, an irrevocable trust was established by Individual A, who then transferred assets to the trust, making a completed gift for gift tax purposes. In this scenario, Individual A retained a grantor trust power, pursuant to Sections 671-678, which caused A to be treated as the trust’s owner for income tax purposes. The retained power did not cause the trust assets to be includable in A’s gross estate.
Generally, property acquired or passed from a decedent receives a basis adjustment equal to the property’s fair market value at the date of the decedent’s death under Section 1014(a)(1). The ruling delineates the seven types of property, described in Section 1014(b), that would be considered to have been acquired from or to have passed from the decedent for purposes of a basis adjustment.
The ruling concludes that, upon A’s death, the trust assets did not fall within any of the seven types of property described in Section 1014(b). As a result, the trust assets would not receive a basis adjustment under Section 1014(a), and immediately after A’s death, the basis of the trust assets would be the same basis they had when A was living.
The IRS specifies that this ruling does not change the result in Rev. Rul. 84-139, in which property acquired from a nonresident, non-citizen decedent that is not included in the decedent’s U.S. gross estate may receive a basis adjustment under Section 1014, if the property is acquired by bequest, devise or inheritance within the meaning of Section 1014(b)(1) or is otherwise specifically described in Section 1014(b).
The fact pattern was careful to specify that upon A’s death, trust debt did not exceed the basis of trust assets, and neither A nor the trust held a note on which the other was the obligor. It is unclear if the situation were different, whether the IRS could deem debt in excess of basis a sale or exchange upon the death of A.