The Hidden Tax Opportunity in Moving Assets Up the Family Tree
Estate planning has spent decades teaching successful families to move appreciating assets out of their estates. That still makes sense when federal estate tax is the primary concern, but it is no longer the right reflex for every family. The federal estate-tax exclusion is $15 million per person in 2026. At that level, many families are more likely to face capital gains tax when appreciated property is sold than federal estate tax when someone dies. That changes the planning conversation. Instead of automatically trying to remove every valuable asset from an estate, it may be worth asking whether certain assets would benefit from being included in one.
Why Basis Matters
Tax basis is the starting point used to calculate gain when an asset is sold. If someone purchases property for $400,000 and later sells it for $4 million, the property has roughly $3.6 million of taxable appreciation before accounting for improvements, transaction costs, depreciation, and other adjustments. Giving the property away generally does not eliminate that gain. In most cases, the recipient takes the donor’s existing basis, so the built-in appreciation follows the property. Property acquired from someone at death is often treated differently. Its basis may be adjusted to its fair market value on the date of death. If the property is then sold near that value, much of the previous appreciation may never be subject to capital gains tax. This is commonly called a basis step-up, although “basis adjustment” is more precise because the value can move in either direction. The general rules appear in Section 1014 of the Internal Revenue Code.
David’s $4 Million Property
David bought a commercial parcel outside Phoenix for $400,000. Years later, the surrounding area has developed and the property is worth $4 million. If David sells, he would recognize roughly $3.6 million of gain. If he gives the property to his children, they generally receive his basis and inherit the same tax problem.
David’s mother owns about $2 million of assets. Adding the property to her estate would bring its value to approximately $6 million, assuming no other significant assets or adjusted taxable gifts. That remains well below the current federal exclusion. This creates an opportunity for upstream basis planning. Rather than moving the property down to the next generation, David may be able to move it up to his mother through a properly designed trust.
If the property is included in her estate when she dies, its basis would be adjusted to its value at that time. If it is worth $4 million and later sold for approximately $4 million, the family could recognize little or no capital gain instead of starting with $3.6 million of built-in appreciation. The numbers are simplified, but they show why basis planning deserves more attention when estate tax exemptions are high.
Why Use a Trust?
An outright gift would give David’s mother direct ownership of a $4 million property. She could sell it, give it away, pledge it as collateral, or leave it to someone David never intended to receive it.
A carefully designed trust can provide more structure. Depending on its terms and applicable law, the trust may establish who manages the property, how income can be distributed, what happens during incapacity, and who receives the property at death. It may also provide a measure of protection from creditors and outside claims.
At the same time, the trust must give David’s mother the appropriate rights or powers to cause the property to be included in her estate for federal estate tax purposes. That inclusion is not an unfortunate side effect. It is what creates the desired basis adjustment.
Simply using an irrevocable or grantor trust is not enough. In Revenue Ruling 2023-2, the IRS concluded that assets in an irrevocable grantor trust did not receive a basis adjustment when those assets were not included in the deceased owner’s gross estate. Estate inclusion and income tax treatment must therefore be designed together.
The One-Year Rule Still Matters
Section 1014(e) limits the basis adjustment for certain appreciated property given to someone within one year of that person’s death. If the property then returns to the original donor or the donor’s spouse, the usual adjustment is generally denied. That rule makes timing and final distribution provisions important. A trust may need different instructions depending on whether the older family member dies within or after the one-year period.
The rule does not eliminate upstream basis planning, but it prevents the strategy from being treated as a last-minute transaction with an automatic result. The plan should account for the possibility of an early death from the beginning.
There Is More Than One Tax at Work
Moving a $4 million property upstream is still a substantial gift. David’s use of his lifetime gift tax exclusion, the need for a gift tax return, and the effect on his remaining estate planning capacity must all be considered. The analysis should also account for state estate or inheritance taxes, property tax consequences, debt on the property, transfer restrictions, and any anticipated sale. A strategy that saves capital gains tax but creates a larger problem elsewhere is not a successful strategy.
None of these issues makes upstream planning inherently too risky. They explain why the strategy belongs in a coordinated estate plan rather than a deed prepared in isolation.
Asking a Better Question
For families facing federal estate tax, removing future appreciation from the estate may remain the priority. For families comfortably below the exemption, preserving access to a basis adjustment may be more valuable. The old question was, “How do we get this asset out of the estate?” The better question is, “Where should this asset be when basis is determined?”
At today’s exemption levels, estate inclusion is not always something to avoid. Used deliberately, it can be one of the most valuable tools in the plan
