Revenue Ruling 2023-02: Updated Tax Consequences of Gifting Your Estate

Revenue Ruling 2023-02: Updated Tax Consequences of Gifting Your Estate

In 2023, the IRS issued Revenue Ruling 2023-02, significantly impacting the transference of assets held in irrevocable trusts. If you are the owner of an irrevocable trust—or are planning to set up an irrevocable trust—you should meet with your accountant to assess the impact of this rule change on your estate plan.

What are the tax benefits of trusts?

There are two basic types of trusts used to transfer assets to beneficiaries: revocable and irrevocable. Revocable trusts can be changed or revoked after they are created; the assets in a revocable trust remain a part of the grantor’s estate and are therefore subject to estate taxes. With few exceptions, irrevocable trusts cannot be changed or revoked. Depending upon the verbiage in an irrevocable trust agreement, transfers to the trust may be considered completed gifts; as such, they are not included in the grantor’s estate and are therefore exempt from estate taxes. If, by the terms of the trust, the grantor maintains the right to determine the beneficiaries and the beneficial enjoyment of the trust assets, the grantor may be deemed not to have made completed gifts when the assets were transferred to the trust. If this is the case, when the grantor passes away, the trust assets will be included in the grantor’s estate and may be subject to estate taxes. An irrevocable trust can be a useful component of a person’s estate plan and long-term tax strategy; however, careful consideration must be given to the terms of the trust agreement.

Up until 2023, assets in revocable trusts and many irrevocable trusts benefited from a provision known as the “step-up in basis” upon the death of the grantor. Under the step-up in basis provision, when the grantor dies, the tax basis (the price originally paid) of a trust’s assets “steps up” to the fair market value at the time of the grantor’s death. What is the significance of this? The step-up in basis provision greatly reduces or eliminates capital gains taxes for the trust’s beneficiary, as he/she is only required to pay taxes on the increase in value of the trust’s assets occurring after the original owner’s death, not the increase in value occurring during the lifetime of the owner.

What changed with Revenue Ruling 2023-02?

With the issuance of Revenue Ruling 2023-02, however, the IRS clarified that any assets held in an irrevocable trust that are not included in the owner’s taxable estate do NOT qualify for a step-up in basis. In other words, an irrevocable trust that excludes the trust assets from an individual’s estate can no longer reap the dual benefits of an estate tax exemption and a step-up in basis. This change, of course, may have significant tax implications for grantors of irrevocable trusts and their beneficiaries.

Assets in many more irrevocable trusts now maintain a carryover basis, as opposed to a stepped-up basis, meaning the assets retain the tax basis of the original owner. Therefore, the capital gains of the gifted assets are calculated using the original tax basis, resulting in higher capital gains taxes for the beneficiary.

This change will begin to impact more people starting in 2026, when the current high exemption threshold for estate taxes ($13.99 million in 2025) is due to sunset. On January 1, 2026, if no actions are taken to change the law, the exemption threshold will reset to approximately $7 million, meaning many more families and individuals will be subject to estate taxes after that point.

Is it time to review your estate plan?

Whether an irrevocable trust remains a tax-beneficial option for transferring your estate depends largely on your individual circumstances. It is important to carefully weigh the tax advantages and disadvantages of the provisions of irrevocable trust agreements with the help of an experienced financial professional.

At RBT CPAs, our Gift, Estate, and Tax practice professionals help clients define their financial goals, understand and weigh their options, and develop an estate plan. We can review legal documents, such as trust agreements, to ensure they are tax-beneficial and aligned with your goals. We are available to meet with you annually to review your estate plan, ensuring it’s on track to reflect your wishes and is adapted to address any tax law changes, such as the ruling discussed in this article.

To learn more about how we can be Remarkably Better Together, please don’t hesitate to give us a call today.

Tax Credits Available to Manufacturers in New York

Tax Credits Available to Manufacturers in New York

As a manufacturer in New York State, you may be able to receive tax credits for purchasing new equipment, creating new jobs, utilizing property for manufacturing, investing in research and development, participating in the Excelsior Jobs Program, and more. Tax credits can directly reduce the taxes you owe and, in some cases, produce a refund. In the spirit of tax season, let’s take a look at some of the tax credits available to manufacturers in New York.

  1. Investment Tax Credit (ITC) and Employment Incentive Credit (EIC)

Businesses in New York that make investments in machinery, buildings, or equipment are eligible to receive the Investment Tax Credit. The standard rate of credit for C corporations is 5% on the first $350 million invested, and 4% for any amount over $350 million. The credit for S corporations, partnerships, and sole proprietorships is a flat 4% rate. Any unused credit can be carried forward 15 years for C corporations, or 10 years for S corporations, partnerships, and sole proprietorships. A corporation that qualifies as a new business can elect to receive a refund for unused credit rather than carrying it forward. If your investment in qualifying property creates additional jobs, your business may also be eligible for an Employment Incentive Credit (EIC) for the two years succeeding the investment. To qualify for the Employment Incentive Credit, you must (1) qualify for the Investment Tax Credit and (2) increase your average number of employees by at least 101% of the average number of employees during the employment base year (the year immediately preceding the ITC year).

  1. Manufacturer’s Real Property Tax Credit

You may be eligible to receive a credit equal to 20% of the real property taxes paid during the tax year on your New York State business property. To qualify, you must use your property principally for manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture, or commercial fishing. For more information about eligibility requirements, see Manufacturer’s Real Property Tax Credit.

  1. R&D Tax Credits

Planning to research new technologies or develop a new product? New York manufacturers may be eligible for both federal and state credits for research and development (R&D) activities. The federal R&D Tax Credit offers a dollar-for-dollar reduction in taxable income for qualifying expenses. This credit is available to U.S. businesses for qualifying research activities like software development, testing new technologies, product enhancements, and more. Qualified small businesses can use the R&D credit to offset quarterly payroll taxes up to $500,000. New York State offers a separate R&D tax credit to businesses participating in the Excelsior Jobs Program. The Excelsior Research and Development Tax Credit equals 50% of the business’s federal R&D credit related to R&D expenses in New York State, up to 6% of research expenses based in NYS (8% for a qualified green project or green CHIPS project).

 

  1. Excelsior Jobs Program Tax Credit

If your business participates in the Excelsior Jobs Program, you may be eligible to receive the Excelsior Jobs Program Tax Credit, equal to the sum of five components:

    • Excelsior Jobs Tax Credit (up to 6.85% of wages per net new job; up to 7.5% for green project or green CHIPS project)
    • Excelsior Investment Tax Credit (2% of qualified investments; up to 5% for green project or green CHIPS project)
    • Excelsior Research and Development Tax Credit (50% of federal R&D credit related to R&D expenses in New York State, up to 6% of research expenses based in NYS or 8% for green project or green CHIPS project)
    • Excelsior Real Property Tax Credit (available to businesses located in certain distressed areas or qualified as Regionally Significant Projects)
    • Excelsior Child Care Services Tax Credit (up to 6% of net new childcare services expenditures)

For more information about the tax credits included under the Excelsior Jobs Program, visit Empire State Development.

Have questions?

Understanding the various tax credits available to New York manufacturers can be a confusing process. That’s where we can help. RBT CPAs’ tax and accounting professionals are here to help you understand and claim credits for your business, allowing you to make the most of tax-saving opportunities in our state. Learn more by speaking with one of our experts today.

Planning Ahead: The Importance of Succession Plans and Buy-Sell Agreements

Planning Ahead: The Importance of Succession Plans and Buy-Sell Agreements

As a construction business owner, you’re on top of your project plans—but what about your succession plan?  A comprehensive succession plan is a critical part of any company’s business strategy, helping to ensure the continued success of your business even after you leave your role as owner.

Why You Need a Comprehensive Succession Plan

A succession plan isn’t merely a piece of paper stating your chosen successor(s). A well-structured succession plan takes several years to develop and may change over time depending on the needs of your business and its stakeholders. It’s never too early to get started on a succession plan. You should begin planning for future transitions long before you expect to retire or leave your position. Life is unpredictable, and you never know when circumstances may demand a change of leadership. In the case of an unexpected event such as illness, injury, or even death, you’ll want to ensure that the management of your business is left in good hands.

When building your succession plan, consider what positions are critical to the operation of your business and identify high-potential employees as possible candidates for succession. A vital factor in developing future leaders within your company is a culture of constant training and mentorship. It is in your best interest to provide frequent, high-quality training opportunities and conduct regular performance reviews of your employees. Experienced construction professionals possess a wealth of hands-on experience, industry knowledge, and valuable skills. Mentorship programs ensure that this knowledge is passed down to the next generation of workers, rather than being lost when experienced employees leave or retire.

Not only does a detailed succession plan provide a blueprint for the future of your company, but it also earns the confidence of your employees, investors, clients, and other stakeholders by assuring them that a plan is in place for the inevitable transition of leadership. As such, it’s advisable to communicate your plan, as well as any changes or updates, to company stakeholders. The plan should be regularly reviewed and adjusted if necessary to ensure alignment with the business’s current goals and needs.

The Benefits of Buy-Sell Agreements

One question that you will face when developing a succession plan is how company ownership will be transferred when the time comes. One option for transferring ownership is through a buy-sell agreement. Buy-sell agreements are typically implemented by companies with multiple owners to guarantee business continuity in the event that one owner leaves the business for reasons such as retirement, voluntary exit, disability, or death. Buy-sell agreements help to protect the business by allowing a smooth transition of ownership, preventing owners from selling interests to outside parties, providing a method for assessing the value of company interests, and avoiding tax consequences of transferring ownership.

There are two main types of buy-sell agreements: cross-purchase agreements and entity-purchase (redemption) agreements. Under a cross-purchase agreement, the interests of the departing owner are purchased by the remaining owners. In the event of an owner’s death, tax-free life insurance policies (taken out by all owners on each other) are often used to fund this purchase. Under an entity-purchase agreement, the business entity itself purchases the interests of the departing owner, also commonly using tax-free life insurance benefits to fund the purchase. The establishment of buy-sell agreements is merely one component of a comprehensive business succession plan.

Set Your Business Up for Success

Investing the time and effort to formulate a succession plan early on reduces the risk of disruption and difficulties for your business down the road. It’s important to work with a team of trusted advisors throughout this process to ensure the long-term success of your succession plan and your business. RBT CPAs’ business advisory services experts are available to assist you with creating and reviewing your succession plan and buy-sell agreement. We are also here to support all of your accounting, tax, and audit needs. For more information, don’t hesitate to give us a call and find out how we can be Remarkably Better Together.