Private Letter Ruling 200937028

Property in an irrevocable grantor trust does not receive basis step-up on death of grantor if not included in taxable estate

The Internal Revenue Service Chief Counsel held, in Private Letter Ruling 200937028, that property held in a grantor trust that is not included in the grantor’s taxable estate does not receive a basis step-up under IRC Section 1014.

According to the letter ruling, the taxpayer had transferred assets into an irrevocable trust and reserved the power to substitute assets, making the trust a grantor trust to the taxpayer for income tax purposes. From the letter, it appears that the taxpayer was taking the position that, because the taxpayer owned the assets in the grantor trust for income tax purposes, the trust assets were “acquired from” the decedent under Internal Revenue Code Section 1014 and should receive a basis step-up, even though the assets were not includible in the taxable estate.

The IRS, according to the PLR, “strongly disagreed” and quoted the regulations: “The purpose of section 1014 is, in general, to provide a basis for property acquired from a decedent which is equal to the value placed upon such property for purposes of the Federal estate tax. Accordingly, the general rule is that the basis of property acquired from a decedent is the fair market value of such property at the date of the decedent’s death. . . Property acquired from the decedent includes, principally, . . . property required to be included in determining the value of the decedent’s gross estate under any provision of the [Internal Revenue Code].”

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