Upstream gifting was virtually unheard of when the federal estate and gift tax exemption amount was a modest $600,000, as it was in the late 1980s and into the 1990s. Because the estate tax rate was 55% during that period, the prevailing strategy for wealthy individuals was to transfer assets down to younger generations as quickly as possible so that any appreciation could occur in the younger generation’s hands, rather than in the wealthy individual’s estate.
In recent years, however, the lifetime gift exclusion amount has increased significantly, reaching $12.92 million in 2023. This means that a married couple can transfer $25.84 million free of federal gift or estate tax – and so can their parents.
|For example: If a wealthy daughter has a father who is not expected to make use of his entire $12.92 million gift limit, the daughter could transfer low-basis assets to the father or to a trust for his benefit that is subject to estate tax. At the father’s death, his estate will not actually owe any estate tax as long as he has enough exemption remaining. However, because the gifted assets are includible in the father’s estate, the income tax basis should be stepped up to the fair market value as of the date of his death.