Blog Post

IRS Disallows Step-Up in Tax Cost Basis for Assets Held by an Irrevocable Grantor Trust

Future Wealth Navigator

Under current law, assets acquired from a decedent receive an adjustment in cost basis to fair market value, thereby potentially eliminating significant unrealized gain. Although Congress has and likely will use this tax benefit as a pawn in future tax legislation, under current law, this benefit remains available to taxpayers. With respect to assets held in trusts excluded from estate tax, the IRS recently released guidance shutting the door on the application of this generous tax treatment to such assets.

Section 1014(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”) provides that “. . . the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be (1) the fair market value of the property at the date of the decedent’s death . . . .” But does this Code section apply to assets that are held in an irrevocable trust that is not subject to estate tax upon the settlor or donor’s death, when the settlor of the trust is treated as the owner of the assets for income tax purposes during his or her lifetime?

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