Refreshing Income Tax Basis Through Powers of Appointment and Lifetime Gifts/Sales

As part of the tax act that was passed in December of 2017 (the "Act"), the lifetime exclusion amount, for individuals domiciled in the US, for federal estate and gift tax purposes under Internal Revenue Code ("IRC") Section 2010(c)(3) was increased from $5 million to $10 million, per person (the ''Exclusion Amount"). The Exclusion Amount is indexed for inflation. For decedents who die in 2018, the Exclusion Amount is $11.18 million. In general, the Exclusion Amount is the maximum value of property that a person may give away during his or her life, or upon his or her death, without incurring any gift or estate tax liability. Since the Exclusion Amount is currently at a historical high, many families and advisors are shifting their focus from minimizing the exposure to estate tax to minimizing the exposure to income taxes for future generations, since assets left in a traditional credit shelter would not receive a basis step up upon the death of the surviving spouse or other beneficiary. Rather, estate tax inclusion and basis step-up under the Internal Revenue Code (the “Code”) Section 1014 is the new focus.

Generally, any assets that are includible in a decedent’s estate are eligible for a basis step-up, regardless of estate tax liability. As mentioned above, under the new rules, the planner’s goal is to take advantage of the elderly parent’s unused Exemption Amount for the benefit of an adult child, whose estate would be subject to federal estate tax at death.  

 There are several planning opportunities available to make use of what would otherwise be a parent's unused Exclusion Amount (thereby increasing the basis of assets and saving income taxes (e.g., capital gains tax) upon a later sale of the assets by a child of the parent).1 Please note that this article is meant as general overview of a few available strategies and does not discuss the various tax and non-tax pitfalls that may occur. The terms “child” and “parent” refer to adult child and elderly parent, respectively.

 1.     Outright Taxable Gift.

Although not ideal and often impractical, a child may make a taxable gift (using some of the child's lifetime Exclusion Amount) to a parent who will die owning the assets and who will leave those assets to the child through the parent's estate plan, at a stepped-up (or down) basis.

 2.     GRAT and Upstream Trust.

A child may create a grantor retained annuity trust ("GRAT'), which pays to the child an annuity for a term of years with a vested remainder, after such term, passing to an upstream power of appointment trust (“UPSPAT”). The USPAT causes the assets to be included parent's estate at death and thereby stepping up the basis of such assets.

3.     Sale to UPSPAT.

A child may create a grantor trust, that is, a trust, that may be for the benefit of the parent, that is includible in the parent's estate for federal estate tax purposes (because the parent holds a general power of appointment (the UPSPAT) and sell assets to it in exchange for a promissory note. For income tax purposes, this installment sale would be ignored.2 The UPSPAT may provide that the parent has a testamentary GPOA over the trust property. When the parent dies holding this testamentary GPOA the assets will be included in the parent's estate.3

Downstream power of appointments should also be considered. Many beneficiaries of trusts will not have a taxable estate at their death. Giving such beneficiaries a general power of appointment in a dynastic trust setting can give old assets a fresh basis.

Here are two real world applications where the planning scenarios discussed above could benefit taxpayers owning real estate:

1. It is not uncommon for a child who has found success to purchase a home for their parent to live in for that parent's lifetime. However, the title to the home generally remains in the name of the child. If the child were to transfer that property to an irrevocable trust with terms granting the parent a general power of appointment over the home, then at the parent's death the home would receive a step-up in basis.5 Likewise, the home could be gifted outright to the parent. In addition

to allowing the parent to live in the home out of love and affection the child would receive a tax benefit (thus making the arrangement more palatable for the child). This particular scenario has benefits and drawbacks in terms of the availability of homestead protections and benefits under Florida law, protecting the parent from exploitation by others or elder abuse, and other transfer considerations such as documentary stamps taxes and lender approval. The best fit for a particular family must be considered taking all of these factors into account.

 2. A child could use one of the above-mentioned methods of accomplishing an upstream transfer of assets with the asset in particular being real estate. Granting a parent a GPOA over a rental property that has been substantially depreciated would result in the property returning to the child at a refreshed basis such that the property could be depreciated again or could be sold while avoiding any depreciation recapture and capital gains tax. Other issues important to consider with transfers of real property is how property taxes, insurance, repairs and maintenance will be handled and which parties are liable for those expenses. Caution for Blended Families Children with parents in a second marriage should use caution if considering moving assets upstream. In such a scenario a gift in trust would be advisable compared to an outright gift. Further, careful consideration should be given as to whether the parent's spouse may be able to reach those assets as a creditor depending on state law and if the couple had entered into a pre or postnuptial agreement. Would those assets be included in an elective estate or subject to an elective share claim? Another concern arises if the parent has significant debt; could creditors stake a claim to the assets in the trust? These are some of the factors to be considered when doing this type of planning.


With the current strength of the economy and high values there are undoubtedly many individuals who have substantial unrealized gains. Now is the perfect time to begin discussions of the various opportunities and strategies that may be used to minimize future recognition of gains and plan for a refreshed basis.


1. See Heckerling Estate Planning Conference 2018 materials entitled, "Putting It On & Taking It Off: Tax Basis Management Today (For Tomorrow)" prepared by Paul S. Lee, Ellen Harrison, and Turney P. Berry for a substantive explanation of certain basis planning opportunities.

2. Rev. Rul. 85-13; CCA 2013-43021

3. IRC 2041

TaxMaria Moller