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Upstream Gifting

Upstream Gifting

With the passage of the Tax Cuts and Jobs Act, the estate and gift tax exemptions were doubled from approximately $5.6 million to $11.2 million per person. With fewer individuals facing an estate tax issue, income tax planning has become a bigger part of each client’s estate plan.  For individuals who have highly appreciated assets and an elderly relative with an estate under the exemption amount, this presents an interesting opportunity. Instead of using the conventional approach of making gifts to the next generation, an investor could gift appreciated securities “upstream” to a family member of an older generation who may be in their later years. When that relative passes away, the cost basis of those securities will be stepped up to the market value on the date of death. As a result, the investor would have fully eliminated the deferred capital gains liability on the investments and in the process saved themselves significant taxes.

An Upstream Gifting Example

For example, let’s say there’s a wealthy investor named Dave who has $10 million of highly appreciated stock with a cost basis of $1 million. He doesn’t need the assets to support himself, and he’d like to use the money to help his children sooner rather than later. However, he’s been putting off selling the stock out of reluctance to pay the tax on his $9 million gain. Upstream gifting offers an opportunity to address this problem. Using his increased exemption amount, Dave can move the stock into an irrevocable trust that’s set up for the benefit of his kids. Then Dave could assign his 95-year old mother, Janet, a general power of appointment (GPOA) over the trust. This GPOA gives Janet some control over the trust, thus moving the assets into her taxable estate. This process would essentially be an upstream gift of $10M from the trust to Janet. Even though Janet has a GPOA, Dave could set up the document in a way that limits Janet’s control and protects his wishes for the trust.

Now let’s say that Janet passes away a few years later, and the stock is still valued at $10M. Since the trust was in Janet’s estate (via the GPOA), the cost basis of the stock will be stepped up to the current $10M market value. With the capital gain eliminated, the stock in the trust could be sold and used to support Dave’s kids without any tax consequences.

Upstream gifting is a strategy that could also be used to accomplish a variety of estate planning and income tax planning goals. If you have highly appreciated investments, please talk to your wealth advisor and your estate attorney to discuss whether an upstream gift may be useful for you or your beneficiaries.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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