Upstream Gifting

Let’s say Sid hit it big with your new product, Spacebook and he went from a middle aged computer geek to a billionaire overnight and lives in California. His aging parents are not in great health. His basis in his dot.com stock is about $10,000. His unrealized gain on that stock is $2,999,990,000. He wants to know how to reduce taxes and liquidate some of his stock in the next ten years. Perhaps he should gift $10,000,000 worth of stock to his parents. When the last parent dies, the stock is stepped up to the date of death value. Thus, the $10,000,000 in stock would now have zero capital gains. But Sid is nervous that his parents might not hold onto the stock. So, he said can I create a trust for them. The answer is yes. There are a number of trust vehicles that will work, so long as the last living parent has when is known as a general power of appointment to appoint the assets to his or her estate or creditors. There are trusts known as intentionally defective grantor trusts in which Sid gets taxed on the income while giving his parents the use of that income. The net result to Sid is tax savings of $3,300,000. You can buy a lot of other things for $3,300,000 and he is able to give his parents an income from that stock for the rest of their lives.