An upstream basis trust can be used to minimize capital gains on assets sold during your lifetime. This is done by providing an older family member (Mom, Dad or Grandpa) a power of appointment in your trust holding appreciated assets with low or no basis.
A general power of appointment (GPOA) empowers the holder of the power to give away or direct the distribution of your property upon your death. This “power of appointment” provides a step-up in the assets in the trust upon the power holder’s death.
You do not have to inform the power holder (Mom, Dad or Grandpa) that they hold this power. You can also limit the exercise of this power to require the prior written consent of another person who is not related to or subordinate to the power holder. The power itself can be somewhat limited, such as appointing assets to a creditor.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Greater care must be taken if the designated power holder lacks capacity when granted or given their power. If so, consider stating that an agent under a durable power of attorney or guardian could act. Note that this would typically mean that the agent is designated in a pre-existing valid durable power of attorney.
Here’s an example
Son buys an office building (or Apple stock) for $1 million. The building or stock is now worth $10 million. If sold, a capital gains tax of 20% to 33.3% might be owed. If held in trust granting Dad a GPOA and Dad dies, the income tax basis is increased to the fair market value as of the date of death. If the building or stock is sold at or around that date, there’s no tax on the capital gain, a tax savings of $2 million to $3.33 million. If the asset is not sold and subject to depreciation, such as a building, the depreciation is now recalculated with a basis of $10 million. This will provide a substantial tax savings even if the building is not sold.
This upstream basis trust was recently discussed at the 2024 Heckerling Institute on Estate Planning, which is one of the premier estate planning and tax planning educational events held nationally each year. We have been utilizing this technique for years. For more information about how this works, please see my article How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!
Related Content
- IRS Quietly Changed the Rules on Your Children’s Inheritance
- Eight Types of Trusts for Owners of High-Net-Worth Estates
- What Assets Should You Put (or Not Put) in Your Trust?
- Four Reasons You Don’t Need a (Revocable) Trust
- Four Reasons Retirees Need a (Revocable) Trust
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
-
Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs InSome brokerage firms are promoting 'event contracts,' which are essentially yes-or-no wagers, blurring the lines between investing and gambling.
