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Caring For Generations

Tax Law Change Forces Estate Plan “Tweaking”

by | Jul 26, 2023 | estate and tax planning, Estate Planning, estate planning documents

“The IRS quietly changes rule on how your children’s inheritance is taxed,” a recent Daily Mail headline reads, explaining that the use of irrevocable trusts will no longer protect heirs from having to pay tax on capital gains on inherited assets.

It’s ironic that only last week, in our Geyer Law blog, we explained that, looking ahead towards the cost of their future medical needs, clients often downsized assets in order to qualify for Medicaid benefits later on. As elder law attorneys, we explained, caution is needed, because gifts exceeding certain amounts can result in one’s being later ineligible to receive Medicaid benefits.

One of the estate planning tools that had the power to protect assets from being subject to a “spend-down” process was an irrevocable trust. Now, under this latest ruling, any property held in an irrevocable trust (and therefore not included in the taxable estate at death), will no longer be eligible for a “step-up” unless certain rights are retained to include the property in the grantor’s estate. 

In a step-up, heirs inherit assets as if they had been purchased at current value, rather than when those assets were actually bought. In a step-up, the capital gain would “disappear” for tax purposes. In an example provided in the Daily Mail article, a couple bought a home years ago for $100,000, transferring that home into an irrevocable trust for the benefit of their children. Later, the trustee sells that home for $250,000, distributing the proceeds to their children. Under the old law, no capital gains tax would have been due. Under the new ruling, capital gains tax would need to be paid on the $150,000 gain in value.

Revenue Ruling 2023-2, introduced in March of this year, is certainly going to have a substantial impact on estate planning, as the Daily Mail reporter Tilly Armstrong admits. Although most families will not find themselves subject to estate tax even with their home included (the current federal estate tax is only applicable to estates valued at $12.92 million or more), the exemption amount is scheduled to be lowered in 2026 to around half that amount.

But even if estate taxes aren’t an issue for some, the main reason to do estate planning is to make sure your assets go to whom you want them to go, Better Investing points out. “The general recommendation is at least every three to five years or when there is a life event,”

At Geyer Law, we couldn’t agree more. Since 1999, we are used to seeing changes in both federal law and in the Indiana legal system. We know one thing: to keep up with changes – whether in tax law or one’s own circumstances – even the best estate plans need a periodic “tweak”.

– by Rebecca W. Geyer