You may not have heard, but there has been a quiet change to inheritance rules that could severely impact families trying to maximize their legacies.

The IRS recently updated some rules about trusts that could make your heirs accidentally liable for capital gains taxes.¹

What Has Changed

Under the new IRS rules, assets inside irrevocable trusts may not receive a step-up in basis unless those assets are included in the taxable estate upon death.

If your estate strategy includes an irrevocable grantor trust, you should work with an attorney and review your trust to avoid saddling heirs with unexpected tax bills.

Typically, assets inherited at death receive a step-up in cost basis to the current fair market value, which eliminates any capital gains achieved during the giver's lifetime. However, under the updated rules, any assets held in irrevocable grantor trusts (used by many to limit estate taxes and protect assets from judgments or creditors) will not receive that step-up in basis unless they are included in the taxable estate.¹

What This May Mean for You

Your loved ones could accidentally inherit a massive tax bill depending on how the trust is set up.

Tax rules change frequently, which makes it critical to review your estate plan regularly. This 2023 change is just one of many that are likely coming in the years ahead.

For example, current estate tax exemption amounts ($12.92 million per person and $25.84 million for a couple in 2023) will expire at the end of 2025.²

That means that if the government doesn't extend the current rules, the estate tax exemption reverts to the 2017 amount of about half of today's limit, and many more families could suddenly become exposed to massive tax bills.

Next Steps

If leaving a legacy to your loved ones is important to you, reviewing your estate strategy for red flags is vital.

We realize that reviewing estate strategies and documents isn’t what most people would consider fun. But a well-planned legacy is as much a gift to our heirs as the financial assets themselves. After all, no one wants to leave problems behind for their loved ones!

If you haven't reviewed your estate plan within the last few years, we would be happy to connect you with an attorney we trust to see if you need to make any changes. Feel free to reach out to our office for a referral.

Sources:

1. https://www.kiplinger.com/retirement/irs-changed-rules-on-your-childrens-inheritance

2. https://www.fidelity.com/learning-center/wealth-management-insights/TCJA-sunset-strategies

Disclosure:

This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax professional.