How Upstream Gifting Can Reduce Estate Taxes While Preserving Tax Advantages

Core Concept - The article discusses a tax minimization strategy called "upstream gifting," which involves transferring assets to older generations to take advantage of tax benefits associated with inheritance [2][4]. Group 1: Upstream Gifting Strategy - Upstream gifting allows individuals to transfer highly appreciated assets to their parents or grandparents instead of directly to their children, preserving the step-up in basis for tax purposes [2][4]. - This strategy is particularly beneficial for expediting the transfer of assets while minimizing taxes owed on inheritance [3][5]. Group 2: Practical Example - An example illustrates how upstream gifting works: if Loretta invests $1 million in a stock portfolio that grows to $5 million, gifting it to her son would not provide tax advantages due to the retained basis [7][8]. - If Loretta holds the stock until her death, the value could increase to $13.3 million, allowing her son to benefit from a step-up in basis and avoid taxes on previous gains, although it may trigger estate taxes [9].