Recently, we have gotten some questions about an IRS rule after MSN featured the article "IRS Quietly Changed the Rules on Your Children’s Inheritance."But as broad as that headline is, the rule only affects a niche kind of estate plan. So to start, let’s talk about what kind of estate planning is not affected.
The recent IRS ruling does not affect powers of attorney, advance directives, wills, revocable trusts, or Oath Protection trusts.
So what does the ruling affect?
The Revenue Ruling affects irrevocable trusts, but only irrevocable trusts that take advantage of the gift tax exemption.
Some irrevocable trusts move assets outside of a client’s name to use up their gift tax exclusion. Right now, the IRS permits individuals to give up to $12,920,000 during their life without paying taxes, but in 2026 that number is decreasing significantly. So some individuals make gifts now to use up their gift tax and not get hit with estate tax. To make these gifts you could give someone something directly or put it in a certain kind of irrevocable trust.
The IRS ruled that if you give a gift to an irrevocable trust that exists outside of your estate at death then your children do not get a step up in basis. The IRS ruled that giving a gift to an irrevocable trust is just giving a gift to a person. The only difference is the trust is an entity and a person is a human. And if you give your children real estate while you are alive, they do not get a step up in basis after you pass away. The IRS is saying—regardless of whom you give the gift to, a person or an irrevocable trust—you lose the step up in basis you could get by transferring real estate through a will, a revocable trust, or even an irrevocable trust that includes assets in your estate.
The article points out that some people may use these trusts to exclude assets from Medicaid, and maybe some attorneys use them, but at Oath we use Oath Protection Trusts. These trusts keep stepped up basises for your kids and exclude certain assets from Medicaid.
If all of that seems complicated, that's because it is. That is why you should work with qualified estate planning attorneys on these matters: we understand complications and hand you solutions.
Ease your complications and meet one of our experts:
Sign up for one of our free estate and retirement planning workshops at: www.oath.law/workshops or request a free consultation with an Oath attorney near you at:www.oath.law/consultation
