W
ealthy entrepreneurs face significant capital gains taxes when selling appreciated assets like stock and real estate. However, they can save millions by using a strategy called upstream transfers. This involves gifting assets to their parents, who then inherit them back before passing away. The children can then sell the assets with a stepped-up basis, avoiding high capital gains taxes.

    For instance, if a top earner sells shares that have appreciated by $1 million since purchase, they would owe around $238,000 in taxes. But if they gift the stock to their parents and inherit it back after their passing, they only pay tax on the appreciation since their parents' death. This can be a huge tax savings.

    Upstream transfers are particularly effective for assets with low cost bases relative to their current value, such as publicly-held stock, real estate, or private business interests. However, this strategy comes with risks and requires careful planning. If the parents decide to share the wealth with a new spouse or other children, the assets can be lost forever.

    Thanks to tax cuts made during the Trump administration, individuals can gift or bequeath $13.61 million before triggering a 40% federal estate tax. This has made upstream planning more popular among ultra-rich clients. However, it's essential to consider family dynamics and ensure that everyone involved is on board with the plan.

    The parents' creditors may also have a claim to the assets, so it's crucial to give them power of appointment over the assets to include them in their taxable estate. Additionally, transparency is key when navigating family dynamics, as upstream transfers can create unrealistic expectations among siblings or spouses.

    The age of the parents is also an important factor, with most planners preferring to use upstream transfers when they are at least in their seventies or expected to live five more years or less. This allows for a delicate balance between avoiding estate taxes and minimizing the risk of losing assets during the parents' lifetime.