POTENTIAL CLARITY OF GRANTOR TRUST BASIS STEP-UP

Potential Clarity of Grantor Trust Basis Step-up
Will the Loophole Remain and for How Long? –

Dear Clients and Friends:
As previously discussed in our Fall/Winter 2023/2024 Client Alert on page 3, a position may be taken based upon current law that assets in a “grantor trust” receive a basis step-up on the death of the grantor. Doing so with proper disclosures mitigates the chance of tax penalties for underpayments based upon a bonafide interpretation of applicable tax law. https://kempelaw.com/wp-content/uploads/2023/12/Newsletter-Fall-Winter-2023-24.pdf

Pursuant to Revenue Ruling 85-13, the grantor of a grantor trust is deemed the owner of the trust assets for income tax purposes. Pursuant to that ruling and other legal authority, some of which may be viewed as substantial authority, this should mean that the Trustee receives the assets as a “bequest or devise” upon the death of the Grantor, allowing a basis step-up under IRC §1014. This so called “loophole” was attempted to be closed by the Biden administration, but no changes to the Internal Revenue Code have occurred as of this time.
To provide their position on this issue, the IRS previously released Revenue Ruling 2023-2, which indicated a step-up in basis is not available for assets owned by an irrevocable grantor trust upon the death of the grantor. However, a Revenue Ruling is only binding on the IRS and is not binding on taxpayers or any Federal Court or the Tax Court, since they are representative of the arguments of only one of the parties before the Court- the IRS. Taxpayers may take a different position, supported by applicable law.

A recent case addressing this issue has just been filed by Belmont Investments, LLC, represented by well-regarded tax attorney, John W. Porter of Baker Botts, against the Commissioner of the IRS in U.S. Tax Court. Belmont, through Mr. Porter, asserts that the taxpayers were improperly denied a cost basis adjustment under IRC § 1014 . This case should hopefully provide greater clarity and insight on the Tax Court’s view of this issue. The decision, whichever way decided, will likely be appealed. Therefore, until finally resolved, taxpayers should proceed with proper guidance of competent tax law counsel when confronting this issue.

If you would like to discuss your specific circumstances, please contact our office at your convenience.

Thank you,
Colby J. Kempe, Esq, LL.M.

Mr. Kempe serves the Florida Bar Association as a member of the Real Property, Probate & Trust Law (RPPTL), Committee; the Palm Beach County Bar Association as the Co-Chair of the Estate & Probate Continuing Legal Education Committee; and the American Bar Association, as a member of the Tax Section Investment Management and Estate and Gift Tax Committees.