In an unexpected move, the Internal Revenue Service (IRS) issued Revenue Ruling 2023-2, directly impacting estate planning and irrevocable trusts.
The move potentially poses significant financial burdens to beneficiaries.
The Daily Mail reported that since 2010 there has been an increase in the utilization of “irrevocable” trusts — a legal measure allowing Americans to protect their assets and avoid a lengthy probate process when a relative dies.
The new IRS ruling reverses the current IRS practice of allowing assets to pass through an irrevocable trust thus effectively eliminating capital gains taxes.
The IRS policy change could expose beneficiaries, most notably children receiving inheritance, to increased tax liabilities.
Kiplinger financial analysts noted that “Americans are now likely to be subject to substantial costs if they do not consider these new rules.” The Kipinger report noted:
“If a couple bought a home in 1975 for $100,000, which is now worth $250,000, and they want to sell the home, they will owe capital gains on the $150,000 growth.”
Financial experts note that creating an irrevocable trust that includes assets within the taxable estate is still possible. This kind of trust arrangement protects the assets from spend-down scenarios and enables a tax-free transfer to children.
Critics of the IRS move note the timing is particularly poor as the weakened economy has put many families in financial peril.
Yahoo! Finance recommended that families reevaluate their estate planning strategies and consider seeking legal advice to mitigate the impact of this rule change.
The IRS Revenue Ruling 2023-2 is targeting high-value estates at this time but could evolve to force many families to confront new tax burdens.
The sudden policy change serves as a stark reminder of the IRS’s capacity to influence personal financial planning, reinforcing the need for continuous monitoring of tax laws and regulatory changes.
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