The Reverse Gravity: Upstream Basis Planning & The GPOA
The Reverse Gravity: Upstream Basis Planning & The GPOA
Why giving assets “up” to your parents creates a tax-free exit for you. How to use the “General Power of Appointment” to wipe out millions in capital gains tax legally.
Executive Summary
- The Basis Problem: You bought Apple stock at $10. It is now $200. If you sell, you pay tax on the $190 gain. If you give it to your kids, they inherit your $10 basis (“Carryover Basis”), so they inherit the tax liability too.
- The Step-Up Rule: The only way to reset the basis to $200 (Tax-Free) is **Death**. Assets included in a decedent’s estate get a “Step-Up in Basis.
- The Strategy (Upstream): Instead of waiting for your death, you grant a **General Power of Appointment (GPOA)** over these assets to an elderly parent (e.g., Grandma) who has low net worth.
👉 When Grandma passes away, the assets are technically included in her estate. Because her estate is below the exemption ($14M), she pays $0 estate tax.
👉 However, the assets get a **Full Step-Up in Basis**. The stock flows back to you (or a trust for you) with a fresh $200 basis. You can now sell it tax-free.
The Creditor Risk
Don’t Give Outright: Never just transfer the stock to Grandma’s personal brokerage account. Her creditors (or nursing home) could seize it.
👉 The Fix: Keep the assets in a Trust. Just grant Grandma the Power of Appointment (the right to direct where assets go) in the trust document. This triggers the tax step-up without exposing the assets to her personal liabilities.
Mechanic: The Tax Wash Cycle
Simulation: $5M Tech Stock Portfolio (Cost Basis: $100k)
| Feature | Gift Downstream (to Kids) | Gift Upstream (to Parent) |
|---|---|---|
| Tax Basis Rule | Carryover (Old, Low Basis) | Step-Up (New, High Basis) |
| Best Asset Type | High Growth Potential | High Unrealized Gains (Appreciated) |
| Prerequisite | Long Time Horizon | Parent with Unused Exemption |
Most estate planning focuses on getting assets out of the estate to avoid Estate Tax. But for 99% of families (who fall under the $28M cap), the real enemy is Capital Gains Tax. Upstream Planning flips the script: put assets IN to an estate to wipe the tax slate clean.”