Traditionally, we think of wealth flowing down from one generation to the next. Grandparents and parents put great thought and care into creating a multi-generational wealth plan—one that will help their youngest loved ones enjoy a more financially secure future.
But for some adults, particularly those with highly appreciated assets or sizable estates, it may make more sense to reverse the flow of gifting. A lesser-known estate planning strategy aptly named “upstream gifting” can help some families accomplish their wealth transfer goals more effectively.
What is upstream gifting?
Upstream gifting refers to the wealth transfer strategy of gifting assets to older generations, such as your parents, grandparents, or other older relatives.
Upstream gifting can be used to minimize your tax liability, namely capital gains tax on highly appreciated assets or estate tax (if your estate exceeds the federal or state exemption limit—the current federal exemption is $13.61 million for individuals).
It’s most commonly used to help families achieve one of the following goals (or in some cases, both).
Provide older relatives with immediate financial support
If your parents or grandparents need help with basic living expenses, medical care, or treatment, you may want to gift them assets that will be immediately sold and converted into cash. If your parents have less taxable income than you do, the capital gains tax liability may be less than if you were to sell the appreciated assets and pay the capital gains tax before giving them the funds. This is because capital gains tax fluctuates based on your taxable income—the higher your income, the greater your capital gains tax bill will be.
Create a future tax-conscious transfer plan for your children.
Families also pursue upstream gifting to create a potentially more tax-conscious transfer strategy for their children. Essentially, assets are gifted to older loved ones, who allow the assets to continue appreciating in value under their care. Eventually, when they pass, the assets are then inherited by their grandchildren or other younger relatives (the final intended recipients).
The components of upstream gifting
To understand the potential benefits of upstream gifting, we need to take a closer look at the components that make it a viable wealth transfer strategy: namely, lifetime estate and gift taxes and step-up in basis for inherited assets.
Gift and estate taxes
When you die, your estate may be subject to estate tax before being transferred to your beneficiaries. The federal estate tax exemption limit is, however, at a historically high rate. In 2024, you may transfer up to $13.61 million per taxpayer (or $27.22 million per couple) before triggering an estate tax.1 However, current estate tax exemption rates are slated to expire in December 2025, reverting back to $7 million per taxpayer, unless Congress acts to extend the current rates.
Some states do impose their own estate tax or inheritance tax as well, which becomes the responsibility of the person receiving the inheritance (as opposed to the estate itself). The exemption limit varies by state, though some parallel the federal limits.
In addition, you may gift a certain amount of money annually and throughout your lifetime tax-free. Your annual gift tax exclusion amount changes each year, but it’s worth noting the exclusion cap is per beneficiary and there’s no limit to the number of beneficiaries you may gift to. In 2024, for example, the exclusion limit is $18,000 per person per giver.2
Anything you gift that exceeds the annual gift exclusion limit will be deducted from your lifetime gift tax exemption—which is the same as your estate tax exemption limit.
Generally speaking, upstream gifting can make the most sense if your beneficiaries (meaning your older relatives) are likely to stay below the estate tax exemption limit, even after they receive the gifted assets.
Step-up in basis
When you purchase an investment or asset, the price you pay is called the “cost basis.” If the asset gains value over time and you sell it, you will generally need to pay tax on the profit (or capital gains). The capital gains can be calculated by subtracting the cost basis from the sale price.
As a simple example, if you purchase a stock for $100/share and sell it for $150/share, your capital gain would equal $50/share. You may then be responsible for paying capital gains tax on that $50/share of profit.
If your beneficiary inherits stock, however, the cost basis adjusts to reflect what the fair market value (FMV) of that asset is on the day you die. With the assumption that stock prices generally trend upward over time, this can create potentially significant tax savings for your children or grandchildren—especially if they want to sell the inherited stock right away.
Using the example above, let’s say instead of selling that stock, you kept it until you died and your child inherited it. The FMV of the stock on the day you died was $200/share. When your child goes to sell that stock, their new cost basis is be $200/share, as opposed to what you paid for it ($100/share). This step-up in cost basis can then reduce the capital gains subject to tax. We’ll talk about how this applies to upstream gifting in the next section.
Pros of upstream gifting
Now, let’s dig into why some people are opting for upstream gifting over the more traditional downstream flow of wealth.
Lower your estate size
If you’re concerned that your estate is nearing the exemption limit, gifting strategically can help you reduce the size of your estate.
If your parents need the money for expenses, you can solve two problems simultaneously, and they’ll likely pay a lower capital gains tax than you would.
What if they don’t need the money? Why not gift appreciated assets directly to your children if that’s your ultimate goal? Because, unlike inherited assets, gifted assets do not receive a step-up in basis.3 If your parents are only receiving the assets in order to leave them to your children after death (instead of needing that money for expenses), they don’t need to worry about the potential capital gains tax liability since they have no intention of selling.
Rather, they would hold on to the asset, allow it to continue appreciating in value, and eventually your children would receive the appreciated asset with the added bonus of a step-up in basis.
Keep in mind: If your older relatives die within one year of receiving the appreciated assets and the assets come back to you, the assets will not receive a step-up in basis.4
Your children may receive their inheritance sooner
The hard reality is, your parents or grandparents are likely to die sooner than you will. One potential benefit of upstream gifting is that if the assets are passed down to your children from your older relatives (instead of you), your children may receive their inheritance sooner.
Because there are limits on the gifts you can give individuals without tax implications, upstream gifting can enable you to pass a sizable amount of money to your children in a more tax-conscious manner.
Cons of upstream gifting
As with any other estate planning strategy, it’s worth considering the potential drawbacks of using upstream gifting as a wealth transfer tool.
You lose control of the assets
Once you gift assets to your parents or other older relatives, you lose all legal rights to those assets. While you and your parents may be in agreement about the estate planning strategy, there’s nothing to stop them from changing their minds or otherwise doing what they wish with the assets, such as selling the securities or naming somebody else as the beneficiary.
Similarly, if you’re giving them appreciated assets as a form of financial support, you may not be able to dictate how they spend the money. While you may intend for it to go toward medical bills, mortgage payments, or food and utilities, they can legally do what they wish. There may be some legal workarounds here (for example, if you’re granted financial power of attorney).
There is an emotional aspect to upstream gifting
Whether you’re interested in using this strategy to support your older loved ones financially or gift strategically to your children, there are some hard truths that you and your families will need to face.
If you’re interested in upstream gifting to support your older loved ones financially, they may be uncomfortable or embarrassed to receive financial support from their children or grandchildren. They could be in denial about their financial well-being, or otherwise against receiving a portion of your estate.
This strategy also relies on the fact that your older relatives will likely die before you—which can be a tough conversation to have, especially as it pertains to money and inheritances.
Who does upstream gifting benefit the most?
Upstream gifting is typically most beneficial to families with highly appreciated assets and/or large estates that may approach the estate exemption limit. In addition, families using this strategy should have a good relationship with their older relatives, since a fair amount of trust is required.
If you’re considering incorporating this method into your estate plan, always talk to your estate planning and tax professionals. To ensure this strategy works, you and your older loved ones will need to work together to get all related estate planning documents updated (like wills and trusts), as well as speak to your children about the intentions of this strategy.
When executed correctly, however, it has the potential to help close-knit families reduce their tax liability and provide financial support to loved ones in an effective manner.
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