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How the New IRS Tax Rule Impacts Irrevocable Trusts in Woodbury

Woodbury irrevocable trusts

As economic fluctuations and demographic shifts underscore unique estate planning needs, trusts continue to serve as a cornerstone strategy. This is particularly true with the rising popularity of irrevocable trusts, designed to protect assets from the taxable estate. However, recent changes in IRS tax rules have significant implications for these trusts.

Understanding IRS Rule 2023-2 and Its Importance in Estate Planning

The 2023-2 IRS tax rule modifies how capital gains taxes are calculated, affecting assets included in irrevocable trusts. This rule alters the traditional method of calculating the cost basis of an asset, which can impact the capital gains tax beneficiaries might face when they sell inherited assets. Stone Arch Law Office is poised to help Woodbury residents understand these changes and adapt their estate planning strategies accordingly.

Also Read: Does A Revocable Trust Become Irrevocable?

How IRS Rule 2023-2 Affects Beneficiaries of Irrevocable Trusts

The cost basis for an asset’s beneficiaries significantly impacts capital gains taxes once they sell. Capital gains from the deceased’s date of purchase will be much higher than fair market value on the date of death. 

Previously, heirs benefitted from a step-up in basis, where capital gains taxes on inherited assets were calculated based on the fair market value at the owner’s death. The IRS issued Rule 2023-2 in early 2023 impacts an inherited asset’s cost basis for capital gains taxes. The cost basis was calculated on the fair market value on the date of death but is based on the deceased’s date of purchase as of March 2023. Calculating taxes from the date of purchase is considered a “step-down,” meaning a lower cost base and higher capital gains. Conversely, the date of death means fair market value at a higher cost basis and less capital gains.

Irrevocable Trusts Under the New Tax Landscape

Irrevocable trusts have traditionally allowed for the exclusion of assets from an estate’s valuation, thereby sheltering them from estate taxes, such as Dynasty Trusts, or aiding in Medicaid eligibility with Medicaid Asset Protection Trusts. With the new IRS rule, the benefits of an irrevocable trust for Woodbury residents need reevaluation. 

Strategic Adjustments for Irrevocable Trusts Post-IRS Rule 2023-2

Families increasingly use irrevocable trusts to safeguard assets from spend-down for government benefits, like Medicaid and VA Aid and Attendance.

The latest tax rule requires a fresh approach to structuring irrevocable trusts. Estate planners must now consider how to structure these trusts to protect assets and minimize tax liabilities effectively.   

Key Takeaways for Woodbury Irrevocable Trusts:

  • Irrevocable trusts no longer receive a step-up in basis for assets not included in the taxable estate at death.
  • Careful planning can still allow assets in irrevocable trusts to pass to beneficiaries tax-free.
  • The IRS ruling requires irrevocable trusts to be structured appropriately to avoid adverse tax consequences.

Also Read: Why Lifetime Gifts Are Better Than An Inheritance

Conclusion:

While the IRS Rule 2023-2 introduces complexities, it doesn’t negate the value of irrevocable trusts in estate planning. With careful planning and professional guidance from Stone Arch Law Office, Woodbury residents can navigate these changes effectively, ensuring that their estate planning goals are met and their legacies are protected.

For personalized advice and to update your Woodbury irrevocable trust or estate plan in line with the new IRS rules, book a call with Stone Arch Law Office. Our estate professionals are here to help you adapt and thrive in the evolving legal landscape.

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