Amy Stiglic, CTFA, Executive Vice President, Market Executive, Kansas City
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Key Takeaways
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Upstream gifting is a strategy that can offer multiple tax benefits. Upstream gifting can allow high-net-worth individuals to potentially lower their overall federal estate tax liability, financially support their parents, and mitigate capital gains taxes for the family member who ultimately inherits the assets if they eventually sell them.
This strategy involves transferring assets to your parents with the intention that they will pass those assets back to you or your children upon their death. Since the assets are included in your parents’ estate at death, those assets will receive a step-up in cost basis, potentially reducing capital gains taxes when the assets are later sold. However, upstream gifting requires careful coordination among family members and proactive estate planning, making it wise to consult your private wealth management team and your estate planning attorney if you are considering this strategy.
Transferring assets to your parents
The first step in upstream gifting is to transfer assets to the generation above you, hence why the strategy is called upstream gifting, as it involves gifting assets “upstream” to your or your spouse’s parent or parents before the assets pass back down to you or your children.
Some assets work better than others for this strategy. For example, assets with significant potential for appreciation are often ideal for gifting, since transferring these assets out of your taxable estate may lower your eventual estate tax liability. Assets that you would like to keep in your family, such as real estate, art, or collectibles, may also be ideal candidates for upstream gifting. These types of assets often align with long-term planning and are less likely to be sold quickly, making them well-suited for upstream gifting strategies.
Note that if the total value of the gifted assets given to an individual per year is greater than your annual gift exclusion ($19,000 for individuals and $38,000 for married couples for tax year 2025), the gifted assets over your annual gift exclusion will be considered a taxable gift. Taxable gifts require filing a Form 709 gift tax return and may use up some of your lifetime exemption from estate and gift taxes. And any additional gifted amount over this exemption ($13.99 million for individuals and $27.98 million for married couples for tax year 2025) of taxable gifts given during your life or assets included in your estate at death may be subject to a top tax rate of 40%. The One Big Beautiful Bill Act (OBBBA) raises the federal lifetime estate and gift tax exemption to $15 million per individual in 2026, avoiding the scheduled sunset that would have significantly reduced the exemption amount from $13.99 million in 2025 to $5 million per individual in 2026, as adjusted for inflation.
Your parents own the assets during their lifetime
Once ownership of the gifted assets is transferred to your or your spouse’s parent, they are no longer included in your taxable estate. For upstream gifting to work as intended, it is critical to align on how the assets should be managed while in their possession. Because your parent will have full legal control over the assets once the gift is made, discussing expectations for ongoing care, management, and eventual transfer prior to making the gift can help ensure the assets remain in the family as intended. However, once your parent assumes ownership of the gifted assets, they have the discretion to handle the assets as they see fit.
If you gift assets that generate income, such as stocks or a rental property, and your parent chooses to take income from the assets, it is important to consider how the income may impact their income tax liability or other income-based costs, particularly if the added income may cause their Medicare premiums to increase.
If you decide to gift assets such as real estate, art, or collectibles, you may also want to gift funds that can be used for the care of these assets. If you gift a home and your parent chooses to live in the home, perhaps the gifted home provides a higher standard of living or greater comfort than their current residence. But it is important that proper planning takes place to ensure the home does not become a maintenance or tax burden for your parents.
Aligning with your parents on the ultimate beneficiaries of the assets is also essential to ensuring upstream gifting does indeed return the assets back to you or to your child. How your parent ultimately designates beneficiaries in their estate planning documents may vary, such as through a will or trust, but the goal is to ensure the assets remain in your parent’s estate to receive a step-up in cost basis. Your parent may need to evaluate how this might impact their federal estate tax liability, which may require proactive adjustments to their existing estate plan as well.
You or your children receive the assets back with a step-up in cost basis
A step-up in cost basis resets the cost basis of an asset to its current fair market value on the owner’s date of death. An asset’s cost basis is used to determine capital gains taxes if the asset were to be sold for more than its original value. In the context of upstream gifting, this means that when you or your children inherit assets back after your parent has passed, any appreciation that occurred while the assets were held by your parent may be excluded from capital gains taxes. A step up in cost basis can substantially reduce capital gains taxes when the assets are later sold.
For example, if assets you originally purchased for $1 million are given to your parent and then appreciate to $1.5 million in value before being passed back down to you or to your child, capital gains taxes will be calculated using the new $1.5 million cost basis. Suppose the assets are later sold valued at $2 million. With the step-up in cost basis, capital gains taxes will only be owed on the $500,000 gain from $1.5 million to $2 million. In contrast, without the step-up in cost basis, the full $1 million gain would be subject to capital gains taxes.
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Estate and capital gains tax planning with upstream gifting The following is an example of how a high-net-worth couple could employ upstream gifting to reduce estate and capital gains taxes across generations. Suppose a high-net-worth couple wants to transfer $2 million worth of closely held stock to their child. However, the couple is not ready to transfer the stock directly, perhaps because their child is still building financial maturity. At the same time, the couple is concerned about the gift and estate tax implications of allowing the stock to appreciate in their own estate. To address this, they gift the stock to one spouse’s parent. This removes the stock from the couple’s taxable estate, uses $2 million of their lifetime exemption, and increases the parent’s estate by $2 million. Now that the parent owns the stock, he or she has full control over the assets. After aligning on family intentions, the parent agreed to take a portion of the income generated by the stock while leaving the rest to their grandson or the son of the couple. When the parent passes away, the couple’s child inherits the stock, which is now worth $5 million. Because the assets were included in the parent’s estate at death, the assets receive a step-up in cost basis, resetting their value to $5 million for capital gains tax purposes. The couple’s child later sells the stock once it appreciates to $6 million. He or she only owes capital gains taxes on the $1 million gain rather than the full $4 million increase from the original $2 million cost basis. Through the multiple benefits of upstream gifting, the couple has taken steps to lower their estate tax liability, the parent received income during his or her life, and the couple’s child owed less in capital gains taxes than if he or she had been gifted the assets directly. |
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Navigate upstream gifting with specialized guidance
Upstream gifting requires thoughtful coordination because it involves aligning estate and tax planning considerations across multiple generations. The financial situation and long-term goals of each party involved in an upstream gifting strategy must be carefully considered to avoid unintended tax consequences or disruptions to family plans.
At Commerce Trust, your private wealth management team is comprised of tax management*, estate planning, and investment management professionals, who can help you understand the tax and estate planning considerations of upstream gifting. If you choose to pursue an upstream gifting strategy, your private wealth management team can also help you navigate family dynamics to align a coordinated approach between you and your parents to ensure the financial and family goals of all parties are considered. Our team can meet with multiple generations of your family to explain how this strategy might work for your personal situation, and to help you understand what implications and benefits could result from upstream gifting for all family members.
Contact Commerce Trust today to learn more about our team-based approach to private wealth management services and how your Commerce Trust team can help you preserve your wealth for generations to come.
*Commerce does not provide tax advice to customers unless engaged to do so.
The opinions and other information in the commentary are provided as of July 22, 2025. This summary is intended to provide general information only and may be of value to the reader and audience.
This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. Consult an attorney for legal advice, including drafting and execution of estate planning documents.
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