Most people have heard about gifting appreciated stock to their children (though, it is not the ideal choice in many situations), as a way of reducing their (potentially) taxable estate and save on estate taxes—or, for most of us, a way to transfer the capital gains tax liability to a person in a lower tax bracket.  But some tax experts are now recommending that their clients gift appreciated assets and securities to their parents in very specific situations.

It may not be as crazy as it sounds in cases where this is applicable.  Consider a couple with some assets that are worth $1 million and almost all of it is taxable upon sale.  Under the enormous lifetime exemption from estate and gift taxes, they can gift these assets to an elderly parent—with the proviso that the elderly parent will leave those same assets to the couple in his/her will.  

In the likely event that the elderly parent pre-deceases the gifting couple, the assets would come back to them with what is called a step-up in cost basis—stepped up to the value at the time the asset returns.  Since capital gains taxes are calculated on the difference between the cost basis and the current value when sold, this means that the $1 million long-term capital gains tax obligation is finessed away.  So too are any additional (otherwise taxable) gains that may have occurred while the elderly parent owned the assets.  

The strategy can be used for stocks, bonds and shares of a company.  

Of course, there are big issues to consider.  One of them is the fact that, once the gift is made, the parent has full legal control over the assets, so there needs to be some conversation about how they will be handled while in the parent’s possession (and hope that they are cooperative).  If the assets happen to be real estate, art or collectibles, the family might want to also gift funds that can be used to take care of the assets.

Also, one must be mindful that the gift/estate tax exemption is not unlimited; $15 million for individuals and $30 million for couples—indexed to inflation.  And it is not unheard of for the arrangement to include the couple’s kids; that is, instead of the people who gifted the stock to the parent receiving it back, it could be transferred to their kids instead.  This would give all the advantages of upstream gifting plus the more traditional advantages of gifting to heirs.

All of this being said, this, and any other gifting strategy, is always highly dependent on a person’s or family’s very specific circumstances.

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.