On Nov. 15, 2012, the IRS issued a Private Letter Ruling (PLR 201245006) that the foreign assets of a nonresident alien decedent’s irrevocable trust (not included in the decedent’s gross estate for federal estate tax purposes) were received by the beneficiaries “by bequest, devise, or inheritance” and so their cost basis is stepped up to the date of death valuation for income tax purposes. The trust was a grantor trust, even though the grantor was a nonresident alien, because only the distributions that Trust may make during Taxpayer’s lifetime are to Taxpayer, under Code Sec. 672(f).
Although a Private Letter Ruling is not binding on the IRS or the Tax Court, the logic of the IRS argument should extend to any Grantor Trust assets receiving a stepped up basis in the Grantor’s estate, even if the assets are not included in the grantor’s estate for estate tax purposes. For the many plans that involve grantor trusts (such as Intentionally Defective Grantor Trusts), this could mean a substantial income tax savings to heirs.