Upstream Planning Becomes a Valuable Strategy to Consider

by Megan Hiles
Photo of a Senior and Young Women Holding Hands

When we think of family gifting strategies, we usually think of wealthy parents giving to their children and grandchildren. However, with the new tax law, new opportunities have opened up for appreciated assets.

Because the estate exemption is now $11.4 million, clients with assets that have substantially increased in value may want to take advantage of the opportunity to gift to the generation above them. Here is how it works:

You own XYZ stock that you acquired 20 years ago at a basis of $10 per share.  The value has skyrocketed to $1,000 per share.  By gifting the stock to a parent or grandparent and having them leave the stock to you after their death, you will receive a step-up in basis to the current fair market value, in this case $1,000 per share.   

With this strategy, you can use the older generations increased exemption to take advantage of the step-up when their assets are below the $11.4 million threshold.  In prior years, this strategy was not as popular since those in the older generation typically were at or above the exemption threshold with their own assets.

Publicly traded stock is easy to upstream gift because an appraisal is not required.  Other property, such as privately traded stock, artwork or collectibles could also be gifted upstream, however, costs for legal work, valuation and appraisals will need to be taken into consideration.

To take advantage of this opportunity, both the person making the initial gift as well as the person receiving it should stay under the estate exemption to avoid increasing either party’s eventual estate tax bill.

If the individual in the later generation should pass away less than one year after receiving the asset, the IRS would treat this as if the gift did not happen and no step-up would be received.

Last, it is important to establish a level of confidence that the person receiving the asset can be completely trusted, as you will no longer control the asset.  For example, if you have concerns that your father could leave the assets to your stepmother or your siblings could contest the will and want ownership of the asset, the potential tax savings may not be worth the risk.  In addition, if you were to die before the person you gifted up to, your spouse and children would not have any legal right to the asset.

In summary, upstream planning can be an excellent planning technique, but only with the right set of circumstances.  Please email to become a client and learn more.