You make the callBy: NATP Research
June 6, 2024

Question: The Mmbaga family owns a strip mall in Dallas, Texas. There are five family members who each own 20%. Ezekiel, the father, is elderly, with seemingly not much longer to live. The family devises a plan for the four family members to each gift their entire interest in the property to Ezekiel. Then, he would bequeath it back to them upon his passing and they would each receive a step-up in basis, per IRC §1014. Is this an allowable tactic?

Answer: This is an allowable tax-saving strategy that could be employed. Its execution must be properly planned to achieve the desired results of the step-up in basis and Ezekiel must survive more than one year after the gifts were made.

There are a few things the family should know –

  • If Ezekiel does not live for more than one year after the upward gifts were made to him, the property is not eligible for the step-up in basis upon subsequent return to the giftees. [IRC §1014(e) disallows a step-up in tax basis on assets that were gifted to the decedent within one year of death unless the appreciated property is distributed to someone other than the original donor or their spouse.]
  • The donors would also be subject to gift tax rules upon making the transfers.
  • There is an element of risk involved, as well. Ezekiel may divert the assets to someone other than the original donors — either intentionally by gift or bequest or unintentionally (by creditor claim).

While not a commonly used strategy, upstream gifting can be effective when everything goes according to plan.

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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.

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