ARI BAUM, CFP®
IN A QUIET BUT SIGNIFICANT MOVE, THE INTERNAL REVENUE SERVICE (IRS) HAS RECENTLY UPDATED RULES RELATED TO TRUSTS THAT HAVE THE POTENTIAL TO IMPACT FAMILIES AND THEIR LEGACIES SIGNIFICANTLY. THIS SEEMINGLY SUBTLE CHANGE COULD INADVERTENTLY LEAD TO HEFTY CAPITAL GAINS TAX BILLS FOR HEIRS.
As we delve into this issue, it becomes clear that staying informed and proactive in estate planning is more crucial than ever.
UNDERSTANDING THE IRS RULE CHANGES
Under the new IRS rules, assets held within irrevocable trusts may no longer receive a step-up in basis, unless these assets are included in the taxable estate upon the grantor’s death. This change has far-reaching implications for individuals who utilize irrevocable grantor trusts as part of their estate planning strategy.
Typically, when heirs inherit assets upon the passing of a loved one, those assets receive a step-up in cost basis to the current fair market value. This step-up effectively wipes out any capital gains accrued during the lifetime of the deceased. However, the updated IRS rules alter this scenario for assets held in irrevocable grantor trusts.
Irrevocable grantor trusts have been popular tools for estate planning due to their ability to limit estate taxes and protect assets from judgments or creditors. Unfortunately, with these new rules in place, any assets held within such trusts will not receive the customary step-up in basis, potentially leaving heirs with unexpected and substantial tax liabilities.
THE RISK TO YOUR LOVED ONES
The implications of this change are clear: your loved ones could unintentionally inherit a massive tax burden, depending on how your trust is structured. This change underscores the importance of regularly reviewing and adjusting your estate plan. Tax rules evolve frequently, and staying up-to-date is essential to avoid unintended financial consequences for your heirs.
PREPARING FOR FUTURE CHANGES
The 2023 rule change regarding irrevocable grantor trusts is just one of many potential alterations to tax laws in the coming years. For instance, current estate tax exemption amounts, which stand at $12.92 million per person and $25.84 million for couples in 2023, are set to expire at the end of 2025. If the government does not extend the current rules, the estate tax exemption will revert to the 2017 amount, which was roughly half of the current limit. Consequently, many more families could find themselves exposed to massive tax bills in the near future.
THE IMPORTANCE OF REGULAR ESTATE PLAN REVIEWS
If passing on a substantial legacy to your loved ones is a priority for you, it is imperative to review your estate planning strategy for any potential red flags. The ever-changing landscape of tax laws demands a proactive approach to ensure that your loved ones are not burdened with unexpected financial obligations. Regularly revisiting your estate plan, especially in light of new IRS rules, is an essential step to safeguard your family’s financial future.
SEEKING PROFESSIONAL ASSISTANCE
Given the complexity of estate planning and the potential pitfalls introduced by the IRS rule changes, it is advisable to consult with an experienced attorney. This legal professional can help you navigate the intricacies of trust structures and estate planning, ensuring that your strategy aligns with your goals and minimizes potential tax liabilities for your heirs.
The recent IRS rule changes regarding irrevocable grantor trusts highlight the importance of staying informed about evolving tax laws. The potential tax consequences for your heirs are substantial, and proactive adjustments to your plan are essential to protect your family’s financial future. As we approach an uncertain future with possible changes to estate tax exemptions, it is crucial to work with professionals who can guide you through the complexities of estate planning and ensure your legacy remains intact for generations to come. If you haven’t reviewed your estate plan in recent years, consider taking action now. Your legacy and your loved ones will thank you for it.
The content is developed from sources believed to be providing accurate information. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results. This information is not intended to be a substitute for specific individualized tax advice. Consult with your financial professional regarding your specific situation.
Ari Baum, CFP® is the founder and CEO of Endurance Wealth Partners, with over 25 years of experience in the Financial Services industry. He brings his in-depth experience to Conceive. Believe. Achieve. for his clients.
Securities and Advisory services offered through Prospera Financial Services Inc. Member FINRA/SIPC.
Brokerage and Advisory accounts carried by Wells Fargo Clearing Services, LLC.
