Advanced Underwriting Consultants

Question of the Day – February 28

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question:  Do the assets in an irrevocable life insurance trust (ILIT) receive a step-up in basis at the grantor’s death?

Answer:  In general, the answer is no.

The life insurance owned by an ILIT generates an estate and income tax free death benefit, which passes through to the trust beneficiaries.  However, the question contemplates other capital assets being owned by the ILIT, and inquires as to their basis upon the death of the trust grantor.

In the past, some experts have argued that the capital assets owned by the ILIT should get a step-up in basis at the grantor’s death so long as the trust is a grantor trust.  A grantor trust is considered to be owned by the grantor for income tax purposes (but not estate tax purposes).  Since the grantor was taxed on the trust’s income, the argument went, the assets should also get an income tax increase in basis at the grantor’s death.

In Private Letter Ruling 200937028, the IRS ruled that an ILIT drafted as a grantor trust did not generate a step-up in basis for the capital assets owned by the trust at the grantor’s death.  The Service observed that the property was given away to the trust (and its beneficiaries) prior to the grantor’s death.  It concluded that property transferred prior to death, even to a grantor trust, would not (receive a step-up in basis), unless the property is included in the gross estate for federal estate tax purposes.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.