How the IRS Has Changed Irrevocable Trust Rules
When the IRS introduced Revenue Ruling 2023-2 in March 2023, the step-up in basis tax provision was altered to put some restrictions on irrevocable trusts. Current estimates state that more than $6.75 billion will be in irrevocable trusts by 2028. If you’re currently creating an estate plan that contains an irrevocable trust as one of its components, the latest IRS rule change might be relevant to you.
What Are Irrevocable Trusts?
An irrevocable trust is often created to reduce the amount of taxes that an estate owes following the decedent’s death. These trusts effectively remove all aspects of ownership, which means that the trust’s assets are no longer part of the grantor’s taxable estate. In this scenario, the grantor doesn’t need to pay income taxes on the assets.
The main limitation to an irrevocable trust is that the grantor is unable to take advantage of this feature if they serve as a trustee. The many types of assets that can be placed in a trust include everything from a life insurance policy to a business.
While trusts are highly beneficial for people who don’t want their beneficiaries to pay a large amount of taxes, it’s expensive to create a trust. The process of doing so requires an attorney. When an asset reaches a trust, the trust takes full ownership of it until the asset is transferred to the beneficiaries.

Difference Between Living Trusts and Testamentary Trusts
There are two types of irrevocable trusts, which include a living trust and a testamentary trust. Living trusts are funded by someone when they are still alive. The various types of living trusts include the following:
- Charitable remainder trust
- Grantor-retailed annuity trust (GRAT)
- Irrevocable life insurance trust
Testamentary trusts can’t be revoked since they are made once the estate owner passes away. The trust is funded directly from the decedent’s estate based on the instructions that they included in their will. Changes can be made to this type of trust while the creator is still alive.
Understanding Step-up in Basis
The IRS rule that was implemented in March changes how the step-up in basis works when it comes to irrevocable trusts. To understand how this rule works, you first need to know what step-up in basis means. If you inherit an asset that has unrealized capital gains, the asset’s basis will reset to its fair market value. If the decedent hadn’t realized some of their capital gains, the tax liability on these gains would be wiped out once the step-up in basis goes into effect.
Let’s say someone buys $200,000 in stock and ends up selling it for $500,000. They would be tasked with paying capital gains taxes on the $250,000 in profit they made. If, on the other hand, this stock is inherited, the new basis for the asset will step up to $500,000, which means that capital gains taxes are only owed if the stock sells for more than $500,000 in the future. If you require assistance in creating an estate plan or irrevocable trust, call our New Jersey estate planning lawyer to schedule a consultation.
New Irrevocable Trust Rules
The step-up in basis has been changed substantially with this new ruling. Now, assets must be part of the grantor’s taxable estate for the basis to reset. Otherwise, it will remain the same as it was before the trust creator passed away. However, everyone who creates an estate plan can take advantage of a $12.92 million exclusion in 2023, which means that most people won’t pay estate taxes.
In 2021, just over 6,100 estates were required to file estate tax returns. However, only 42% of these individuals paid any estate taxes. While it’s possible for people to take advantage of the step-up in basis by placing their irrevocable trust assets within their taxable estate, the estate tax exemption will drop all the way to $5 million in 2026, which means that more people will owe taxes.
There are many reasons why people choose to use irrevocable trusts. Even after this latest rule change, an irrevocable trust can be used to reduce assets and qualify for nursing home assistance through Medicaid. These assets could then be passed on to beneficiaries following the person’s death.
Developing an estate plan or opening an irrevocable trust allows you to control what happens to your assets when you die. If you believe that now is the right time to start an estate plan, call our New Jersey estate planning lawyers today at (201) 996-1200 to make your first appointment.