By John M. Goralka
Sacramento, CA
An upstream basis trust can be used to minimize capital gains on assets sold during your lifetime. This is done by providing an older family member (Mom, Dad or Grandpa) a power of appointment in your trust holding appreciated assets with low or no basis.
A general power of appointment (GPOA) empowers the holder of the power to give away or direct the distribution of your property upon your death. This “power of appointment” provides a step-up in the assets in the trust upon the power holder’s death.
You do not have to inform the power holder (Mom, Dad or Grandpa) that they hold this power. You can also limit the exercise of this power to require the prior written consent of another person who is not related to or subordinate to the power holder. The power itself can be somewhat limited, such as appointing assets to a creditor.
Greater care must be taken if the designated power holder lacks capacity when granted or given their power. If so, consider stating that an agent under a durable power of attorney or guardian could act. Note that this would typically mean that the agent is designated in a pre-existing valid durable power of attorney.
Here’s an example
Son buys an office building (or Apple stock) for $1 million. The building or stock is now worth $10 million. If sold, a capital gains tax of 20% to 33.3% might be owed. If held in trust granting Dad a GPOA and Dad dies, the income tax basis is increased to the fair market value as of the date of death. If the building or stock is sold at or around that date, there’s no tax on the capital gain, a tax savings of $2 million to $3.33 million. If the asset is not sold and subject to depreciation, such as a building, the depreciation is now recalculated with a basis of $10 million. This will provide a substantial tax savings even if the building is not sold.
This upstream basis trust was recently discussed at the 2024 Heckerling Institute on Estate Planning, which is one of the premier estate planning and tax planning educational events held nationally each year. We have been utilizing this technique for years. For more information about how this works, please see my article How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!
