When Can Tax Planning Be an Act of Love? This Family Found Out
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As a mom, there is nothing more important to me than knowing my kids will always be safe. Not just physically safe, but financially safe, too.
I never want them to find themselves in a terrible situation simply because they didn’t have enough money or didn’t know how to navigate a financial decision.
That protective instinct runs deep. In fact, according to a Bankrate survey, more than three in five parents of adult children are sacrificing their own financial well-being to help their children feel secure and supported.
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This is the story of three generations of women who love each other deeply and used a little-known tax strategy not just to grow wealth, but to protect it and pass it on with intention.
With the support of Natalie Colley, a senior lead financial adviser and partner at my firm, Francis Financial, they were able to turn a tax code into a tool for love.
Meet the family: Susie, Mary and Francie
Let’s begin with Mary, aged 60. She worked hard, saved well and several decades ago used $55,000 of her savings to purchase an up-and-coming company called Apple (AAPL). She now holds more than 11,000 shares of stock, and they’re worth more than $3 million.
The bad news is that Mary cannot sell the stock without facing a huge tax bill, as the stock has grown by well over $2.9 million.
If Mary sells the Apple stock, she will owe taxes on the growth of the investment, which is the difference between what she originally paid and what it’s worth today. The original amount she paid is called her cost basis. Think of cost basis as the starting line of an investment.
Mary’s daughter Susie is 30, working hard and building a life. Like so many women her age, she’s managing a career, raising her children and struggling to set aside savings for the future.
Then there’s Francie. She’s 82, lives with Mary and is warm, funny, sharp and deeply devoted to her daughter and granddaughter. Francie doesn’t have many assets of her own, so she’s not facing any estate tax issues.
This is a family that cares for one another and wants to make the best decisions they can, together.
The dilemma: A gift with strings
Mary knows that she has more money than she needs and is not sure how to share her wealth in a way that will not trigger a huge tax bill. Mary considered giving the Apple stock to Susie right now. But when she brought this idea to her financial adviser, Colley, she learned there is a catch.
When appreciated stock is given as a gift during your lifetime, the recipient inherits the giver’s cost basis. That means Susie would receive the Apple shares with Mary’s original $55,000 cost basis. If Susie sold even part of those shares, she’d face a massive capital gains tax bill.
It would look like a generous gift. However, if Susie sold later to create a diversified portfolio that would be more appropriate for her, she would face taxes on nearly $3 million of capital gains. It would be a devastating tax bill dressed up as a generous gift.
The solution: Step-up in basis
Colley introduced a strategy, called a step-up in basis, that could make all the difference.
When someone dies and leaves you an investment, the IRS resets the cost basis to the value on the date of death. This is referred to as the step-up in basis. It means that all the growth from the original purchase up to that moment is completely wiped away for tax purposes.
In Mary’s case, that meant Susie could receive the Apple shares after Mary’s death and avoid the tax bill altogether. But Mary is healthy and young. Susie could be waiting decades. So their adviser proposed a surprising, loving and innovative idea.
The strategy: Upstream gifting
What if, instead of giving the stock to Susie, Mary gave it to Francie?
Francie is older and does not have enough in assets to trigger any estate tax at her death. By giving the stock to her, then allowing Francie to pass it to Susie later in her will, Susie could still receive the step-up on the basis of the Apple stock. This would effectively eliminate more than $2.9 million in capital gains taxes.
The difference for Susie could be hundreds of thousands of dollars in avoided taxes, which she can use to build a future, create stability or put toward her own children’s education and financial security.
The risks: Trust and timing
Upstream gifting isn’t perfect. Once Francie owns the stock, it’s hers. She could change her will. She might need the money for medical costs or care. Or she might not live the required full year for the gift to qualify.
This isn’t a strategy for every family. But for Mary, Susie and Francie, the love and transparency they share gave them confidence to move forward.
What assets should be given upstream?
Not everything should be given upstream.
Mary also recently bought Nvidia (NVDA) for $180, and it’s now trading around $191. There’s barely any gain. This is the kind of asset that works beautifully for downstream gifting to Susie. The basis is close to the current value, and the growth potential lies ahead.
Rules of thumb:
- If an asset has large unrealized gains, consider holding it for a step-up in basis
- If the asset has little to no gain, or you expect strong future growth, consider gifting it now
More ways families can preserve wealth
You don’t need millions to take advantage of these smart tax strategies. Here are a few ideas we often share:
Advanced planning is key, but the most important thing is to talk to your family. The best estate plans begin with honest conversations and shared values.
Estate planning, for most, is about creating a financial legacy that lifts the next generation forward, free of unnecessary burden or fear.
If you’d like to explore how to build this kind of plan for your family, you can reach out to Natalie Colley at Francis Financial ([email protected]). She brings not only deep expertise in estate, tax and investment planning, but also the kind of care and heart that makes all the difference.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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