Accavallo & Company, LLC

Protecting Your Assets with Carefully Crafted Trusts: Now is the time to seek the AAA of Estate Planning: Attorney, Advisor, Accountant

trust document

Creating a trust to safeguard your assets and provide for your heirs is a strategic move in estate planning. One essential consideration is ensuring that your trust is designed to take full advantage of the benefits provided by 26 U.S. Code § 1014, which grants a step-up in basis on inherited property. This step-up can potentially save your beneficiaries from capital gains taxes when they inherit appreciated assets. However, recent IRS developments have raised concerns regarding the eligibility of certain trusts for this tax advantage.

Understanding the Step-Up in Basis: First, let’s clarify the significant benefit of the step-up in basis. This provision allows heirs to reset the cost basis of inherited assets to their fair market value at the date of the decedent’s death. In other words, it eliminates capital gains taxes on any appreciation that occurred during the decedent’s lifetime. This is particularly valuable for individuals inheriting real property that has seen significant appreciation over the years.

In March 2023, the IRS issued Revenue Ruling 2023-2, which has implications for beneficiaries of Irrevocable Trusts. The ruling excludes assets held in an irrevocable trust, not included in the taxable estate at the grantor’s death, from eligibility under § 1014. The ruling emphasizes that property transferred through “completed” gifts to the irrevocable trust is not eligible for the step-up in basis.

Designing the Trust for Dual Objectives: For those considering the creation of a Medicaid Asset Preservation Trust or a similar irrevocable trust, striking a balance between Medicaid compliance and IRS eligibility is vital. The trust design should aim to achieve two seemingly conflicting objectives:

Medicaid Compliance: The Medicaid agency should recognize that the settlor no longer owns the assets, which is crucial for the trust’s intended purpose.

IRS Eligibility: The IRS should consider the settlor to still own the assets, allowing for a basis step-up at death.

Achieving both these objectives is possible through careful trust design. One effective approach is to grant the settlor a limited power of appointment to change the beneficiaries of the irrevocable trust. This doesn’t impact the gift for Medicaid purposes but prevents a completed gift for tax purposes, thus enabling the step-up in basis at death. However, it’s essential to account for variations in Medicaid agency rules and their approach to irrevocable trusts.

Consideration of IRS Ruling 2023-2: It’s worth noting that Revenue Ruling 2023-2 addressed a different context – an intentionally defective grantor trust involving a completed gift. Most Medicaid planning involves incomplete gifts from a gift tax perspective, potentially making this ruling less relevant to your specific planning approach.

Additional Benefits of a Limited Power of Appointment: Creating an irrevocable trust with a limited power of appointment not only supports eligibility for § 1014 but also makes the trust a grantor trust. This means that the grantor will be responsible for paying the trust’s taxes, which can be advantageous due to the trust’s more favorable tax brackets.

Protecting Your Home: One common asset placed in an irrevocable trust is the family home, especially if it’s not fully exempt under state Medicaid rules. The trust instrument can grant the clients the right to live in the home for the rest of their lives, similar to a life estate. Properly drafted, this can preserve Sec. 121(a) gain exclusion.

The Importance of Careful Drafting: While irrevocable trusts can be powerful tools for asset protection, poorly drafted trusts can have adverse consequences. These may include harming your tax plan, creating liquidity problems, and more. Given these potential pitfalls, Medicaid trust planning should involve a team of professionals, including an attorney, financial planner, and CPA.

If you’re considering creating an Irrevocable Asset Preservation Trust, it’s essential to consult with an experienced Estate Planning Attorney who understands the nuances of trust design to preserve and protect your assets effectively. If you already have such a trust in place, it’s equally important to review it to ensure it aligns with your goals and preserves the eligibility for § 1014 benefits. If your trust falls short in this regard, it may be necessary to modify it or execute a new trust to secure the future financial well-being of your loved ones. Trust design is not a one-size-fits-all endeavor, and attention to detail is paramount in achieving your estate planning objectives.

Contact our Team at Accavallo & Company, LLC / [email protected] / (203) 925-9600


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Sherri Fisher is a Tax Manager at Accavallo & Company, LLC.  Sherri has longstanding expertise in Trust and Estate Taxation, Eldercare, and Estate planning. Sherri appreciates the relationships she has built with estate planning attorneys and advisors, to provide a team approach to assisting her clients. Sherri also has seasoned experience in business and individual taxation and is partial to assisting start-ups in developing overall accounting and operating plans.

Prior to joining Accavallo & Company, LLC, Sherri was a manager in a large firm, servicing high net worth trust clients, business, and personal clients. She was also a Partner in a large bookkeeping firm, which specialized in cloud accounting systems for regional and national companies. Sherri led a team in assisting clients to organize their accounting systems.  She is a graduate of Florida Atlantic University with a B.S. degree in Accounting.    

Sherri’s experience includes working with companies and organizations in a variety of industries including:

  • Investment Trusts

  • DAPT and Family Investment Partnerships

  • Estate and Probate Administration

  • E-Commerce

  • Manufacturing

  • Construction

  • Real Estate Investment

  • Marketing and Service-based industries

In addition to her professional accomplishments, Sherri is an Intuit Advanced Pro Advisor, Intuit Future Firm Advisory Board member, member of the Valley WIN Network, and proudly served as past Connecticut Public School liaison for the Yale Tommy Fund for Childhood Cancer. Sherri enjoys time with her family, Cleveland sports, thrifting and gardening.