23 Aug Gift of Appreciated Assets to Elderly Parent Could Save You Taxes – Gain Without Pain?
Avoiding capital gains tax is often considered in estate planning. Now some are considering “upstream planning” when a child has highly appreciated assets and his or her elderly parent does not have a taxable estate (for estate tax purposes).
Generally, if you own an asset (i.e., stock, real estate, etc.) that has gone up in value from the original purchase price that you hold until the date of your death, then there is no capital gains tax on that appreciation. Your beneficiary would only pay tax on appreciation from the value as of the date of your death until the date of sale. So, for example, if you bought stock for $30,000 that appreciated to $100,000 as of your date of death, then your beneficiary would not have to pay capital gains tax on the $70,000 increase. If the asset had been sold during life, then there would be a capital gains tax (the percentage of tax varies by the tax bracket of the owner) on the increase. Similarly, if the appreciated asset is given to someone else (the donee), then the donee would have to pay capital gains tax on the appreciation if the asset was sold.
However, what if the appreciated asset was given to someone (i.e., your parent) who kept the asset until death? Furthermore, what if the beneficiary (i.e., the child) was the same person who originally gifted the appreciated asset? This is strategy called “upstream planning.”
Upstream planning is usually considered when there is only one child and that child has highly appreciated assets. If the child has an elderly parent who doesn’t have a taxable estate (the estate tax limit for those who die in year 2024 is $13,610,000, although it is supposed to be approximately $7 million in year 2026)), then the strategy would be to give the appreciated asset to the elderly parent gambling on the parent’s death before the child so that the child (who is to inherit the appreciated asset gifted) would not have to pay capital gains tax on the increase from the date of purchase to the value as of the date of parent’s death.
This may sound good in theory, but there are numerous risks to consider before doing this including, but not limited to, the following:
- Parent changes their mind
What if you and your parent have a disagreement and the parent decides to not give you what you gave to the parent? What if your parent remarries? Do you have any siblings?
- You die first
There is no guarantee that you won’t predecease your parent.
- Parent’s estate at death is greater than the estate tax limit
The state tax limit is supposed to be reduced in 2026 – probably between $7 million to $7.5 million. If parent’s estate is too large, then there could be estate taxes.
- Parent needs public benefits
It is not unusual for the elderly to get governmental assistance for long-term care. If the parent doesn’t have some long-term care insurance or other assets to take care of this potentially large expense, your gifted assets could be used for the parent’s care as the gift would likely disqualify the parent from certain Medicaid or VA (veteran’s) programs whereby eligibility is determined by the amount of the applicant’s assets.
- Parent gets sued
If your parent is liable or becomes liable for any debts or negligence, your gifted assets could be subject to your parent’s creditors. Many kids are already concerned when letting their elderly parent drive.
- Parent dies within one year
If your parent dies within one year of receiving the appreciated asset, you won’t get the step-up in cost basis under the Internal Revenue Code rules.
- Do you have the right type of appreciated asset to give?
Stocks (publicly traded) that have appreciated are best to give since there is a definite value unlike artwork (which would be more likely to be challenged by the IRS). Although real estate could be given, your primary residence has certain tax benefits that you may want to keep. Furthermore, even if you give a home to your parent, then if the parent receives Medicaid, the home could be a countable resource subject to spenddown (if it is not the parent’s homestead). If the parent uses the real estate as a homestead, then it could be subject to a claim by the government for benefits advanced after your parent’s death if that parent was on Medicaid. Certain assets such as retirement accounts, 529s, annuities, etc. would not be permitted the step-up in basis as such type of assets would be considered income in respect of a decedent. These type of assets would not be considered in upstream planning.
- What if your parent loses mental capacity and needs guardianship?
If you give assets to a parent who subsequently needs guardianship, then it is possible that court supervision over the assets may be needed which must be used on your parent since it is your parent’s assets after receipt of the gift.
Although many would like to rush to avoid paying capital gains and take advantage of upstream planning, it takes the right situation.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.