Upstream Planning: What an Orange County Estate Tax Lawyer Wants You to Know

Upstream planning is an estate planning technique that anticipates a future inheritance for yourself with less tax liability. Once only utilized by the super-wealthy, anyone who has appreciated assets may benefit from upstream planning as an effective estate planning strategy.  While most estate planning is focused on what you may leave for your children or future generations “downstream,” consider looking “upstream” to save on income and capital gains taxes for yourself.

With the passage of the 2017 Tax Cuts and Jobs Act, income tax planning became an important component of traditional estate planning, and upstream planning gained popularity. In short, upstream planning means transferring certain appreciated assets, real property, for example, to an older (and less wealthy) family member. In upstream planning, you effectively use your estate plan to reduce your tax liability for the future sale of an asset. For example, if you transfer real property to your parent and when your parent dies, the property passes back to you, as the “downstream” beneficiary, you, the child, would obtain a stepped-up basis on the real property. When you eventually sell the property, you would pay less in capital gains taxes than if you had never passed the property upstream.  

How is this practically done? The child would need to give their parent a general power of appointment over the property. The Internal Revenue Code requires that you give your parent the power to appoint the asset to his estate, his creditors, or the creditors of his estate. When you provide such a power, the property becomes part of the parent’s estate (not yours), which ensures a basis step-up and capital gains tax savings when the property is passed back to you.  

While this estate planning technique may seem almost too good to be true, it is not without risk. Granting this power is risky since your parent could give this property to anyone. Your parent’s creditors could also make a claim to the property or proceeds of its sale to satisfy their claims. In addition, you no longer have any control over the property. Given the uncertainties, complete and total trust between you and your loved one is critical. You also may consider your overall health in your potential upstream planning. While no one can predict the future, if you were to die before your parent in the above example, your spouse and children would not have any right to the property.   

An experienced Orange County estate tax attorney can assist with upstream planning. They can help you draft the documents you need to accomplish upstream planning and help you plan how your assets will be handled once the property is returned to you upon your upstream relative’s passing. 

Contact us today to discuss all your estate planning options, including whether upstream planning is right for you. To schedule an appointment at our Orange County law firm or one of our many other offices located throughout the state of California, simply call (800) 244-8814. 

If you have any further questions about estate planning and strategies to shield your wealth, or if you’d like to have your current asset protection plan reviewed to make sure it still meets your needs, please contact us at one of our offices located throughout the state of California 800-244-8814 to set up a consultation.