HomePoliticsIRS Quietly Changes Rule That Could Impact Your Children's Inheritance

IRS Quietly Changes Rule That Could Impact Your Children’s Inheritance

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A financial strategy employed by affluent taxpayers to transfer their assets to their offspring rather than placing them in a nursing home has become potentially less appealing.

In March, the Internal Revenue Service issued Revenue Ruling 2023-2, which, according to Kiplinger, has a “substantial impact on estate planning, particularly where an irrevocable trust is involved.”

As Americans age, they frequently spend their final years in a long-term care home or other facility and rely on Medicaid or another government program to cover the costs of their care, according to the website.

As a prerequisite for eligibility for Medicaid or other government-funded bill-paying programs, the majority of states require individuals to spend down their accumulated fortune.

This means that money or the value of a property that an American wished to leave to a child is gone, prompting Americans to establish what are known as irrevocable trusts to transfer their assets to the intended recipients.

The new IRS regulation targets these trusts.

The U.K. Daily Mail explained in layman’s terms that the second purpose of an irrevocable trust is to avoid estate taxes by translating tax jargon.

An individual transfers property, such as a residence, into the trust. If a householder who purchased a property for $150,000 passes away and it is sold for $300,000, there is a tax on the $150,000 capital gain.

However, if the property was transferred to an irrevocable trust, there is no capital gains tax due to a piece of bureaucratic jargon known as a “step-up in basis.” The literal translation of this phrase is that the trust pays no capital gains tax when it sells the house because, for tax purposes, it received the house at its current market value.

That was in the past.

According to Kiplinger, the new IRS ruling means that property in a trust that is not included in a person’s taxable estate no longer receives a “step-up in basis,” so capital gains taxes can be collected.

“What does that mean? Essentially, in a move that is likely meant to make sure that as many estates as possible become subject to paying estate taxes, if you establish an irrevocable trust that is not set up properly, you will lose the step-up in basis,” Kiplinger wrote.

According to the website, federal estate taxes presently apply to estates with a value of at least $12.92 million; by 2026, this threshold will decline to what Kiplinger estimates will be roughly half of that amount.

According to Reuters, the ruling is not the final word. As with all battles of wits between the IRS, which seeks to obtain as much as possible, and financial planners, who seek to safeguard their clients’ assets, each new move by the IRS is met with a countermove by estate planners.

The complete ruling can be found on the IRS website.

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