Most families think about inheritance in one direction: parents leave assets to children.
But in some cases, a powerful tax planning opportunity may involve temporarily moving appreciated assets the other way — up the family tree.
This is known as upstream basis planning.
To understand the idea, start with basis. Your tax basis is generally what you paid for an asset. If you bought stock for $100,000 and it is now worth $500,000, you have a $400,000 built-in gain. If you sell it, that gain may be subject to capital gains tax.
But when someone dies owning an appreciated asset, that asset may receive a “step-up” in basis. In plain English, the tax basis may reset to the asset’s fair market value at death.
So instead of heirs inheriting stock with a $100,000 basis, they may inherit it with a $500,000 basis — potentially reducing or even eliminating the built-in capital gain.
Upstream basis planning applies this concept in reverse.
For example, an adult child with highly appreciated stock might gift that stock to a parent who has a modest estate and no expected estate tax issue. The parent then owns the asset and names the child, grandchildren, or another intended beneficiary to receive it at death.
If structured correctly, the asset may be included in the parent’s estate and receive a step-up in basis before passing back down to the family.
That could turn a $400,000 unrealized gain into a major planning opportunity.
This is not a do-it-yourself strategy. There are important rules and risks, including a one-year rule that can deny the step-up in certain situations if the asset returns to the original donor too quickly. There are also practical concerns around control, incapacity, creditors, family conflict, and estate documents.
In some cases, this planning may involve a trust. In simpler situations, it may not. The right structure depends on the family, the asset, and the tax picture.
Upstream basis planning may be worth exploring for families with highly appreciated taxable assets, older relatives with unused estate tax capacity, and clear multigenerational planning goals.
At Hanover Advisors, we help families identify planning opportunities that are easy to miss — and coordinate with tax and estate professionals to evaluate whether advanced strategies like this may fit their broader financial picture.