Upstream gifting involves transferring valuable assets to an older generation (usually parents or grandparents) before these assets eventually reach the intended beneficiaries (often the grandchildren). 

As an example, you are a 45 year old business owner with cryptocurrency with a basis of  $100,000 but a FMV of $1,000,000.  You could gift the crypto UP to your parents.  When you parents pass, the crypto could pass back to you (or your children) with a "step up in basis" at the current FMV.  You have no reset your basis. 

This strategy is most effective in families where:

• The older generation possesses a relatively smaller estate.  For example, you are a business owner with significant net worth while your parents do not have a large estate.
• The assets in question have appreciated significantly in value and have the potential for further growth.

1. Tax Exemptions and Limits: As of 2024, estates and gifts are exempt from taxes up to a generous lifetime limit ($27.22 million for couples and $13.61 million for singles). 
   1. Upstream gifting assumes the older generation has unused portions of their estate and gift tax exemptions.
2. Step-Up in Basis: Beneficiaries receive a step-up in the cost basis for inherited assets. This adjustment effectively erases the tax obligations on any accumulated capital gains, providing a clean slate for future tax calculations.
   1. In theory, you can get the assets back after death, with a NEW FMV cost basis
3. Evasion of the Three-Year Clawback Rule: Assets transferred as completed gifts are excluded from the donor's estate if they surpass the three-year mark, aiding in estate size reduction and tax liability minimization.

1. Asset Transfer: The parent or asset owner gifts the appreciated asset to their elder, utilizing a portion of their estate/gift tax exemption. 
   1. Initially, the asset retains its original cost basis (carry-over basis).  If the parent sells the asset, they would have a large income tax bill (so this is never advisable and offers some protection).
2. Estate Planning Adjustment: The elder modifies their estate plan, naming the grandchildren, children or others as the eventual recipients of the assets. This move allows the asset to appreciate further without impacting the parent’s estate tax exemption limit.
3. Beneficial Basis Step-Up: Upon the elder’s death, the asset’s basis is stepped-up to its current market value, removing any capital gains tax liability accumulated over the years.

At Anomaly we have designed this strategy a few times.  As a real world example, consider Carla, who transferred a highly appreciated commercial property to her father, Frank. 

This strategic move not only decreased her estate’s value by $5 million (the property's worth at the time of transfer) but also shifted future income and appreciation out of her estate. 

When Frank passed, the property, now valued at $9 million, was inherited by Carla’s son, George, with a stepped-up basis, significantly reducing potential capital gains taxes.

• Upstream gifting can strategically decrease estate size and potential tax liabilities.
• It's suitable for families with considerable asset appreciation and generational estate size variances.
• This approach offers a way to support elder care while preparing assets for future generations in a tax-efficient manner.
  
  

Interested in chatting more?  Drop us a line on Soraban!