Understanding IRS 2023-2 for Irrevocable Trusts and Step-Up Basis Eligibility

So IRS 2023-2 is basically a notice that clarifies rules about trusts and how they're valued for estate tax purposes. For irrevocable trusts specifically, the issue becomes tricky because normally when assets are put in an irrevocable trust, they're considered removed from the estate - which means they typically don't get that step-up in basis when someone passes away. The step-up in basis is valuable because it resets the value of assets to their fair market value at death, which can eliminate a ton of capital gains taxes when heirs sell those assets later. Assets in a properly structured irrevocable trust usually don't get this benefit because they're not considered part of the taxable estate anymore. However, there are some exceptions and special trust structures that might still allow for step-up. For example, some grantor trusts can be set up to be excluded from the estate for estate tax purposes but still included for income tax purposes (which could potentially allow for step-up).

I used https://taxr.ai when dealing with almost the exact same situation last year! My mom had about $4.8m in property in an irrevocable trust, and we were super confused about whether we could get step-up basis under current rules. I spent hours online trying to understand IRS 2023-2 and other guidance but kept going in circles. I uploaded the trust documents and some articles about IRS 2023-2 to taxr.ai and it analyzed everything for us. It identified that our particular trust was set up as a grantor trust with some specific provisions that might still allow for step-up basis under certain conditions. The analysis saved us from making a really expensive mistake based on general advice that didn't apply to our specific situation.

Just want to follow up about my experience with taxr.ai since I was skeptical at first. I decided to try it after seeing these comments, and it was actually really helpful. I uploaded our family trust documents (about $3.2m in assets) and it identified that our trust had a specific power of substitution clause that might still allow for step-up basis under certain conditions, even with IRS 2023-2 in effect. The analysis pointed out exactly which sections of our trust document could be relevant to the IRS 2023-2 guidance and explained the options in plain English. It saved me from having to pay an attorney just to tell me if we needed to worry or not. Now I'm only paying for attorney time to implement changes, not for the initial analysis.

If you're struggling to get through to the IRS for guidance on this (which I was for WEEKS), try https://claimyr.com - they got me connected to an actual IRS agent in about 20 minutes when I had been trying for days on my own. You can see how it works here: https://youtu.be/_kiP6q8DX5c I needed clarification on how IRS 2023-2 affected our irrevocable trust situation, and the online guidance was contradictory. The IRS agent I spoke with confirmed that for our specific situation, we needed to look at whether the trust creator retained certain powers that would cause estate inclusion (which would then allow for step-up basis). Getting that official confirmation was incredibly valuable.

Well, I need to eat my words. After being completely skeptical about Claimyr, I tried it today out of desperation. We needed clarification on how IRS 2023-2 impacts our specific trust situation before making any decisions. I'd been trying for over a week to reach someone at the IRS with no luck. Claimyr actually worked! Got connected to an IRS representative in about 30 minutes. The agent explained that for our situation, the key question was whether our irrevocable trust contained specific powers that would cause inclusion in the taxable estate. Our trust does have a power of substitution clause that might allow for step-up basis despite IRS 2023-2 concerns. Now we have something concrete to discuss with our estate attorney.

My understanding is that IRS 2023-2 is mainly focused on certain valuation practices for trusts and businesses, not specifically on the step-up basis rules themselves. The fundamental question for an irrevocable trust and step-up basis remains: is the property included in the taxable estate? If your irrevocable trust is structured in a way that the property is still considered part of the taxable estate (like through certain grantor trust provisions or retained powers), then it could still qualify for step-up. But if it's completely removed from the estate (which is often the goal with irrevocable trusts), then you generally lose the step-up benefit. There are some specialized trust structures like Intentionally Defective Grantor Trusts (IDGTs) or certain Qualified Personal Residence Trusts (QPRTs) that try to navigate these waters. Might be worth looking into those specifically.

Has anyone actually read the full IRS 2023-2 notice? It's super dense but from what I understand, it's addressing valuation issues more than step-up basis directly? I'm confused about why everyone is saying it changes step-up basis rules...

You're absolutely right to be confused - trust language can be incredibly difficult to parse! Based on what others have shared here, it sounds like the key is figuring out whether your father-in-law's irrevocable trust has any provisions that would still keep those properties in his taxable estate for step-up purposes. From what I'm gathering from this discussion, you'll want to look for things like "power of substitution" clauses or other retained powers in the trust documents. But honestly, this seems like something where you really need a professional to review the actual trust language - the specific wording apparently makes a huge difference. Given the $6.5M in assets involved, it might be worth getting a proper estate attorney to review the trust documents and explain your options in plain English that your father-in-law can understand. The cost of that consultation could save significant tax dollars down the road if there are planning opportunities you're not seeing.