In our previous blog post we discussed the taxability of trust distributions, specifically the distinction between principal (non-taxable) and interest (taxable) payments.
There have been several major updates since we wrote that blog post that directly impact trust inheritances and estate planning. In fact, some of the most significant shifts in decades have occurred or are currently taking effect.
In 2023, the IRS issued a major ruling that changed the game for Irrevocable Trusts.
Previously, many assumed that assets in an irrevocable trust would get a "step-up in basis" to fair market value upon the grantor's death. The IRS clarified that if the assets are not included in the grantor's gross estate for federal estate tax purposes, they do not receive a step-up.
Beneficiaries may now inherit assets at the original purchase price (carryover basis). If they sell the asset, they could face a much larger capital gains tax bill than they would have prior to this 2023 clarification.
The "One Big Beautiful Bill" Act (2025/2026)
There was a major legislative shift regarding the "Sunset" of the 2017 Tax Cuts and Jobs Act. Originally, the high federal estate tax exemptions (approx. $13M) were supposed to drop by half in 2026. However, new legislation (referred to as the One Big Beautiful Bill Act) has made these higher limits permanent and even increased them.
For 2026, the federal exemption has risen to $15 million per individual ($30 million for married couples). This means even fewer families will be subject to federal estate taxes than previously predicted.
California’s Proposition 19 (Fully in Effect)
While Prop 19 passed in late 2020, its full impact on trust administration and property taxes has only become clear in the last couple of years.
- Principal Residence Requirement: Heirs must now move into an inherited family home within one year and claim it as their primary residence to keep the parent's low property tax base.
- The $1M Cap: Even if they move in, there is now a cap. If the home’s market value exceeds the original taxable value by more than roughly $1.044 million (this number adjusts for inflation), the property will be partially reassessed, leading to higher property taxes.
- Rental/Second Homes: These no longer qualify for any parent-child exclusion and are fully reassessed to market value upon transfer, which can be a massive financial shock to beneficiaries.
SECURE Act 2.0 (Inherited IRAs)
If the trust holds retirement accounts (like an IRA), the rules changed significantly regarding how quickly beneficiaries must take distributions.
Most non-spouse beneficiaries must now fully distribute (and pay taxes on) an inherited IRA within 10 years, rather than "stretching" it over their lifetime. This often pushes beneficiaries into higher tax brackets during those 10 years.
To learn more about the inheritance process or estate planning works contact Law Offices of David A. Arietta. www.ariettalaw.com or (925) 472-8000.