Want to Leave Assets to Heirs? IRS Rule Change Should Have You Rethinking Your Irrevocable Trust

If you’re interested in an irrevocable trust, or already have one, it may be time to take a closer look. Recent IRS rule changes surrounding could significantly affect how much wealth you’re able to pass on to your heirs. For years, irrevocable trusts have been a go-to strategy for high-net-worth families looking to protect assets and reduce taxes. However, your estate plan might now require a second look. Understanding how these changes impact you can help ensure your legacy stays protected.

A financial advisor can help you understand how trusts and estate taxes will affect your legacy giving.

What Is a Step-Up in Basis?

When someone inherits an asset with unrealized capital gains, the basis of the asset resets or “steps up.” This means it updates to reflect the current fair market value. The step-up in basis wipes out any tax liability for the previously unrealized capital gains.

For example, say you purchased stock for $100,000 two years ago and sold it now for $250,000. You would pay capital gains tax on the $150,000 profit above the original basis of $100,000. If you inherit that stock, however, your new basis steps up to $250,000. You’ll pay tax only if you sell the stock for more than that amount.

To protect their assets, many people place them in an irrevocable trust. This means they lose all ownership rights to the assets. Instead, the trust becomes the owner of the assets for the benefit of the trust’s beneficiaries.

How IRS Rule Change Impacts Irrevocable Trusts

Previously, the IRS granted the step-up in basis for assets in an irrevocable trust but the new ruling – Rev. Rul. 2023-2 – changes that. Unless the original owner includes the assets in the taxable estate, the basis doesn’t reset. To get the step-up in basis, the owner must have included the assets in the trust as part of the taxable estate at the time of death.¹

That’s the bad news. The good news is that because of the $15 million per-person exclusion in 2026 ($30 million for married couples), few estates in the United States pay even a portion of the estate tax.²

In 2024, 7,125 estates filed estate tax returns, with just 2,663 of them (37%) paying any tax at all.³ By including the irrevocable trust assets in the taxable estate, heirs who are the beneficiaries of the trust will dodge the tax hit and receive the step-up in basis.

Why would someone be using an irrevocable trust? A typical reason is to remove assets from your ownership in order to qualify for Medicaid nursing home assistance. A parent could place a home worth $500,000 into the trust, qualify for Medicaid but, by including the home in their taxable estate, then pass the property on to their children tax-free at a basis of $500,000.

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How to Know If an Irrevocable Trust Is Right for You

An irrevocable trust can be a powerful estate planning tool, allowing you to transfer assets out of your taxable estate, protect them from creditors, and provide a structured way to pass wealth to your heirs. Once established, however, the terms of the trust generally can’t change without the beneficiaries’ consent or a court order. This makes it important to fully understand what you’re giving up, primarily control over the assets, in exchange for potential tax and legal benefits.

Before creating an irrevocable trust, think carefully about your long-term financial objectives. If your priority is to minimize estate taxes or protect assets from future liabilities, this type of trust can be effective. But if you anticipate needing access to the funds for personal use (such as medical expenses, retirement income or emergencies) then you should consider a more flexible arrangement like a revocable trust or gifting strategy.

An irrevocable trust offers strong protection and potential tax savings, but it also limits flexibility. They work best for individuals with substantial estates who know how they want to manage and distribute their assets. For those who value control and flexibility, other estate planning tools may achieve similar goals with fewer restrictions.

Reviewing Your Existing Irrevocable Trust Under the New Rules

If you created an irrevocable trust before 2023, the new IRS ruling may affect your heirs’ step-up in basis. Start by reviewing the original trust document. Does it explicitly state you want to include the assets in your taxable estate? If not, your trust may not deliver the step-up benefit under current rules. If your estate is modest and will remain below the $15 million threshold indefinitely, the rule change may not impact you.

Gather your key documents. Locate the original irrevocable trust document, a complete list of assets held in the trust with their original purchase prices and current fair market values, and the names and relationships of all beneficiaries. Include any amendments or modifications made since the trust was created. This information helps advisors assess your situation quickly and estimate potential costs versus tax savings.

Contact an estate attorney first. Tax advisors can calculate the numbers, but estate attorneys draft the language needed to preserve step-up basis. Some trusts may need only minor amendments. Others may require restructuring if they’re overly restrictive or no longer align with your goals. An attorney determines which path applies to you.

If your trust already includes beneficiaries’ consent provisions, adding language about taxable estate inclusion might require just an amendment document, not a complete rewrite. Costs depend on complexity but may be worthwhile if it unlocks step-up basis benefits worth hundreds of thousands to your heirs.

Many trusts drafted for Medicaid planning or creditor protection don’t include taxable estate language. Amendment is inexpensive compared to the tax bill your heirs may face. Once you understand your specific situation, you can decide whether amendment, restructuring, or no action is appropriate for your circumstances.

Bottom Line

Woman discusses her estate plan with her daughter, son-in-law and grandchildren.

Anyone using an irrevocable trust should be reviewing their estate plan to make sure it complies with the updated IRS rule and preserve the step-up in basis for assets that the trust will pass on to their heirs. Building a sufficient estate plan is also something that most people should try to have in place in order to limit issues for their family down the road.

Financial Planning Tips

A financial advisor can help you make sense of important rule changes so your financial plan stays on track. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Life insurance can play a vital role in the financial planning process so that your loved ones are protected in the event that something happens to you. SmartAsset has a life insurance tool specifically designed to help you determine how much coverage you need.