What IRS Revenue Ruling 2023-2 Actually Says and Why It Does Not Affect the Living Trust Plus®

Published: Tue, 09/02/25

Updated: Tue, 09/02/25

What IRS Revenue Ruling 2023-2 Actually Says and Why It Does NOT Affect the Living Trust Plus®

A: Clarifying Misconceptions About Step-Up in Basis and Irrevocable Trusts

Since the IRS issued Revenue Ruling 2023-2 in March 2023, I have gotten dozens of emails from clients asking about their Living Trust Plus Estate Plans because they have read some article claiming that the IRS "changed its rules" about irrevocable trusts and step-up in basis. Many articles — including some written by attorneys and CPAs — have spread the mistaken idea that no irrevocable trust allows a step-up in basis at death. This misunderstanding has led to mass confusion and concern among clients who have already created certain types of asset protection trusts, particularly those using our Living Trust Plus® Asset Protection Trust.

Attorneys and CPAs and clients need to understand that Revenue Ruling 2023-2 was a confirmation of existing law and changed nothing about the tax treatment of the Living Trust Plus or similar trusts designed in a way such that the trust assets are intentionally part of the taxable estate of the trust settlor. And no — this is not an “intentionally defective” trust; there is nothing defective about it, as it is very carefully and intentionally designed to be treated as a grantor trust for income tax purposes and as part of the Settlor’s taxable estate for tax purposes to preserve the step-up in basis. High net worth estate planners who know nothing about elder law may call this trust “intentionally defective,” but that is the most stupid term ever devised by anyone. Why would you want to put your money into something that's “intentionally defective”?

Let’s be clear: Revenue Ruling 2023-2 was a confirmation of existing law and changed nothing about the tax treatment of the Living Trust Plus.

What the Ruling Actually Says — and What It Doesn’t

Revenue Ruling 2023-2 confirmed (did not change) a longstanding principle of tax law: if an asset is not included in your taxable estate at death, then it does not receive a step-up in basis. The ruling addressed a specific type of irrevocable trust where the assets were intentionally removed from the taxable estate — typically done by high-net-worth individuals for estate tax avoidance — and concluded that, under those conditions, no step-up in basis applies.

Again — his is not new law. It simply reaffirms what has been understood by experienced estate planning and elder law attorneys for decades:

A step-up in basis under IRC § 1014 only applies to assets that are included in the decedent’s estate for federal estate tax purposes.

If the asset is not includible under IRC §§ 2036 or 2038 — because the decedent retained no incidents of ownership or control — then it is not eligible for the step-up.

The ruling does not affect irrevocable trusts where the assets remain part of the grantor’s estate, as is the case with the Living Trust Plus.

The Living Trust Plus® Has Always Been and Remains Estate-Includible

Unlike high-net-worth planning tools designed to remove assets from the estate for federal estate tax purposes, the Living Trust Plus was never created with that goal in mind. Its purpose is entirely different — it is designed to protect assets from Medicaid and long-term care spend-down requirements, not to avoid estate tax.

Because of that fundamental distinction, the Living Trust Plus has always been structured as follows:

It is a grantor trust for income tax purposes — meaning you, the person setting it up, continue to report income from trust assets on your personal tax return.

It is includible in your estate for estate tax purposes under IRC § 2036(a)(2) because you retain the power to change beneficiaries, sometimes the right to receive income, and sometimes the right to live in the trust-owned home.

As a result, assets in the Living Trust Plus receive a step-up in basis at your death — just as if they had remained in your name.

This has always been the case. Revenue Ruling 2023-2 does not change this structure, nor does it cast doubt on the well-established treatment of grantor-type irrevocable trusts that are estate-includible.

Why So Many Other Articles Are Misleading

Unfortunately, many of the articles circulating online are based on a flawed assumption: that all irrevocable trusts are designed to remove assets from the estate. That may be true in the world of ultra-high-net-worth estate planning — where the goal is to reduce or eliminate estate tax — but it is not true for Medicaid-focused planning or for the Living Trust Plus.

These misleading articles make several incorrect generalizations: (1) they treat all irrevocable trusts as if they are the same — failing to recognize that there are dozens of distinct types, each with different drafting goals, tax treatments, and estate inclusion consequences; (2) they suggest — without basis — that Revenue Ruling 2023-2 is a change in the law, when in fact it is just a reiteration of a long-standing rule.

The Living Trust Plus was never designed for high-net-worth individuals looking to avoid estate tax. It was built for average Americans — middle-class families who want to preserve their hard-earned assets from the devastating costs of long-term care. The trust structure deliberately preserves income tax advantages, including the step-up in basis.

The Bottom Line: Nothing Has Changed for Living Trust Plus Clients

If you have a Living Trust Plus® already in place — or are considering setting one up — here’s what you need to know:

Revenue Ruling 2023-2 does not affect you. Your trust assets are still includible in your estate, so they still receive a step-up in basis at death. You still retain the full income tax benefits of grantor trust treatment. You still have a powerful legal structure to protect your assets from Medicaid and long-term care spend-down requirements.

In short, there is no need for concern — but there is a need to understand the difference between irrevocable trusts designed for asset protection and those designed for estate tax reduction. The Living Trust Plus is part of the former category, and it was carefully crafted to preserve the step-up in basis while still offering the protections you need.