In January of this year, the IRS came out with its Revenue Ruling 2023-2 which clarified the issue regarding adjusted cost basis inside an irrevocable trust. Simply put, most assets either real estate or investments (not annuities and not IRAs) will receive the cost-basis adjustment at the death of the owner. That means that if you purchased stock for $1.00 a share and at your death its worth $50.00 a share, your family inherits it at the cost basis of $50.00 a share. When they go to sell it, they pay the difference between the $50.00 and the sale price, thereby eliminating or mitigating the capital gains.

The Revenue Ruling of January 2023 now tells us that any assets in an irrevocable grantor trust do not receive the stepped-up basis. This is qualified, however, by further defining that those assets that are not included in the grantor’s estate will not receive the stepped- up basis. That is significant because the assets in a traditional Medicaid trust that we draft are includable in the grantor’s estate. Again, meaning that the use of our Medicaid trust allows for the assets to receive the stepped-up cost basis at the time of the decedent’s death and allows for the best tax treatment possible. In essence, the grantors of these trusts are receiving both asset protection from nursing homes and the preferential tax treatment of the cost basis adjustment at their death. Further, the trust, by its terms, allows the individual to reside in their home allowing them to receive both the tax benefit of the star exemption as well as the homestead exemption when and if they sell the house inside the trust.

In sum, the Revenue Ruling does not affect the Medicaid trust that we draft and therefore allows the most effective tax treatment possible.
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