Wealthy entrepreneurs face hefty capital gains taxes if they want to cash out after building a successful business from the ground up. Upstream transfers take advantage of a tax loophole for inherited assets that boosts the cost basis to its fair market value at the time of inheritance. By gifting appreciated stocks to parents, they mitigate tax liability when selling the assets after inheriting them, which can potentially save significant amounts in capital gains taxes.
Individuals can lose their assets for good if their parents decide to share the wealth with a new spouse or other children. Upstream planning is a powerful but risky tool—only about a quarter of clients actually proceed with it after considering family dynamics and risks, as once you examine those, it doesn't work for every family.
If an investor sells appreciated stock, they would have to pay roughly $238,000 in taxes on a $1 million appreciation. However, if they gift the stock to their parents and inherit it back, they pay taxes only on the appreciation since the parents' death, often resulting in significant tax savings.
The idea is to maximize tax efficiency by leveraging the family wealth structure, and choosing the right asset is key. Publicly-held stock, real estate, and private business interests are often the best candidates for this approach, as they typically feature a low cost basis relative to their current value.
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