Advisors are dusting off an old tax-savings strategy after it got an enormous boost under the new tax law, enabling taxpayers to wipe out massive potential tax obligations on appreciated assets.
The maneuver is simple: You give a highly appreciated asset—such as stocks that have gone up in value—to a parent or trusted elder, with the understanding that it will be bequeathed back to you. At that point, it gets a step-up in cost basis—which means you can sell the shares immediately without owing any tax on the gains it accumulated since you initially bought the stock.
The key to the renewed interest in this strategy—called “upstream planning” because the assets initially flow from the younger generation to the older—is the new tax law, which doubled the amount anyone can give away in assets, while alive or after death, to $11.4 million. The exemption can be used to shield your estate from taxes upon death or during your lifetime to make tax-free gifts—such as appreciated assets using upstream planning.
Few taxpayers have used this strategy over the past couple of decades because the estate tax exemption has ranged between $600,000 and $5.49 million, low enough for many folks to want to preserve it until death.
“People didn’t want to use up their estate tax exemption, but the whole paradigm has shifted because of this new high exemption amount,” says Jere Doyle, an estate planning strategist at BNY Mellon Wealth Management. “When they doubled the exemption, everyone thought they’d do away with the step-up in basis at death, but that didn’t happen. So this creates a huge opportunity for taxpayers.”
Consider a scenario in which an owner of a $1 million family business with $900,000 in gains wants to sell the business to retire, but is hesitant because of the 20% capital-gains tax—or $180,000—he would have to pay.
“This technique could make that $180,000 go away,” says Steve Parrish, adjunct professor of advanced planning at the American College of Financial Services. “You could continue to run the business for a while, and when Dad dies, it passes to you with no tax obligation.”
Courtesy of barrons.com