Florida Bar Journal

Upstream Basis Planning — The Estate Planner’s Income Tax Planning Tool

This article revisits the upstream basis planning opportunity now enhanced by the enactment of the One Big Beautiful Bill Act. The upstream basis plan implicates both federal estate tax and federal income tax regimes, carefully navigating between them to avoid a transfer tax while taking advantage of the income tax basis adjustment benefits resulting from the inclusion of assets in the federal gross estate at death. This article explores the opportunities created under the new legislation together with practical considerations for the estate planner who may wish to advise clients on this planning tool.

The Wasted Federal Estate Tax Exemption: Time To Revisit Upstream Basis Planning

There is no question that the most impactful federal tax legislation of 2025 was the passing of the One Big Beautiful Bill Act (the act).^[1] For estate planning attorneys, the act makes permanent the ever-shifting federal credit against estate tax by setting the 2026 basic exclusion amount (frequently referred to as the “estate tax exemption”) at $15 million per taxpayer (adjusted annually for inflation).^[2] While the Tax Cuts and Jobs Act of 2017 (the TCJA)^[3] doubled the basic exclusion amount, the increased basic exclusion of the TCJA applied only to decedents dying after December 31, 2018, and before January 1, 2026.^[4] The act removes the TCJA’s sunsetting feature of the basic exclusion amount, making it permanent (unless Congress changes the law in the future).^[5]

If we assume that these large federal estate tax exemptions are permanent, it may be safe to say that the federal and estate transfer tax regime, as we’ve known it, may be less relevant for more taxpayers going forward.^[6] For example, tax-minded estate planners who may no longer need to prioritize federal estate tax planning might find themselves focusing almost exclusively on income tax planning opportunities, working to minimize capital gain income tax attributes passed to beneficiaries from a decedent.^[7] Decedents’ estates may have exclusion amounts well in excess of the asset values included in their federal estate, effectively “wasting” the unapplied exclusion and associated federal estate tax credit. This article focuses on this wasted or unused exclusion amount and explores planning opportunities for taxpayers to use this wasted credit by structuring what practitioners have called “upstream basis planning” (or UBP). For the right taxpayer, the UBP structure may provide a tax advantageous income tax cost basis adjustment at the death of an older (upstream) beneficiary, using the beneficiary’s unused exclusion by including assets in the upstream beneficiary’s estate. This article reviews the provisions of the Code^[8] and supporting authority endorsing the UBP structure, mechanics of UBP in connection with irrevocable trusts for Florida residents, and the risks associated with granting the powers to beneficiaries necessary to allow for these tax advantages as well as alternative planning approaches.

Federal Law and Trust Structure: The Foundation for a Successful Plan

In its most basic form, UBP can be accomplished when a donor transfers an appreciated asset to another taxpayer who holds that asset until death.^[9] Upon the transferee taxpayer’s death, under Code §1014, the transferred basis is replaced with the fair market value of the asset, and the same asset can be transferred back to the donor or to a member of the donor’s family, thereby minimizing embedded capital gain. This straight gift structure will be referred to in this article as a “simple example.” While straightforward, the foregoing simple example structure is riddled with planning issues. First, the lifetime transfer uses the transferor’s gift tax exemption, and then the transferee’s estate tax exemption, on presumably the same asset on the retransfer back to the donor, who may again include that asset in his estate, using additional exemption. Further, the transferor’s completed gift to the transferee means that the transferor has given dominion and control of the asset to the transferee and there are no guarantees that the transferee will retransfer the asset as intended, or that another third party does not have a priority claim on the asset prior to its distribution from the transferee decedent’s estate.

For the reasons discussed more in the following section, a more thoughtful UBP structure would utilize an irrevocable trust as the recipient of the low basis property, which includes powers that result in inclusion of all (or a portion of) the trust assets in the estate of the powerholder (defined below), achieving a basis adjustment on the affected trust assets, but protecting them from an unintended retransfer. UBP effectively leverages the basis adjustment rules of Ch. 1 of the Code (specifically §1014 to include assets in a taxpayer’s gross estate for income tax basis adjustment purposes), while strategically avoiding estate tax imposed under Ch. 11. The following subsections provide an overview of the federal statutory framework in Code Ch. 1 and as they each separately apply to the upstream basis plan.

• Federal Estate Tax Inclusion — In connection with UBP utilizing a trust, inclusion in the intended beneficiary’s estate can be achieved by granting that beneficiary a general power of appointment.^[10] Generally, a power of appointment is a right given by one person (the donor) in favor of another person (the powerholder) that may be exercised during life or at death to direct the transfer of an interest in property (the appointive property) to another person (the appointee) to the extent of the right granted to the powerholder. ^[11] If the power granted to the powerholder is not a general power of appointment, the provisions of Code §2041(a) do not apply. A general power of appointment is distinguishable from a non-general power in that a general power of appointment is a power that is exercisable in favor of the decedent, his or her estate, his or her creditors, or the creditors of his or her estate, subject to the limitations proscribed in Code §2041(b)(1)(A)-(C).^[12] If a general power of appointment is held at death, then the inclusion in the decedent’s estate is not the value of the power, rather the value of the appointive property subject to that power.^[13]

• Federal Income Tax Provisions — For lifetime gifts and transfers, Code §1015 generally provides that the income tax cost basis in the hands of the donee “shall be the same as it would be in the hands of the donor....”^[14] If, however, the fair market value of the asset subject to the transfer is less than the donor’s cost basis, the fair market value is used as the replacement cost basis of the donee, and any embedded loss is not transferable to the donee.^[15] Code §1014(a) provides different rules for basis of property acquired from a decedent. For the donee, the cost basis of property acquired from a decedent is the fair market value of such inherited property at the date of the decedent’s death.^[16] For the determination of the property’s fair market value, Code §§2032 and 2032A are applied, as well as rules applicable to land subject to conservation easements.^[17] The application of Code §1014 is indiscriminate and adjusts the transferred asset’s cost basis to both eliminate capital gains in an appreciated asset as well as eliminate capital losses in a devalued asset.

• State Law Overlap — While Florida has no relevant state estate tax or state income tax to consider in connection with UBP,^[18] the careful planner should also consider the application of other states’ tax laws as to whether, and to what extent, those state laws may trigger unintended tax consequences.^[19] Of the 11 states imposing an estate tax, all but Connecticut have lower exemption thresholds than the current federal estate tax exemption.^[20] As the upstream basis plan intentionally includes assets in the federal gross estate of a decedent to trigger the application of Code §1014, including the appointive property in the estate of a decedent may create a state level estate tax.

The Mechanics of the Upstream Basis Plan: The Who, What, and How

Although the simple example of a direct gift to a donee with the hope of a retransfer is not ideal from a planning perspective, that example is effective to illustrate the four elements required to structure a successful upstream basis plan: 1) a transfer, of 2) an appreciated asset, 3) included in the transferee’s federal gross estate, and 4) a retransfer. The following subsections analyze each of these required elements.

• Transfer of Property — While federal law determines how property is taxed under Ch. 11 of the Code, state law determines whether, and to what extent, a taxpayer has “property” or “rights to property” subject to taxation.^[21] Accordingly, federal tax is assessed and collected based upon a taxpayer’s state-created rights and interest in property. Florida law is well-settled that the elements of an inter vivos gift are present donative intent, delivery, and acceptance.^[22] These elements are conjunctive, and all must be present for a gratuitous transfer to occur. As discussed in more detail in the following subsection, the transferor’s completed gift and resulting exclusion from the transferor’s estate are a key component to the success of the upstream basis plan. It is also worthwhile to note that some assets may have restrictions on transfer (such as closely held interests) or execution formalities (such as real property conveyances), and each should be reviewed carefully to ensure that the transfer is accomplished lawfully and effectively.

• Appreciated Asset — It may seem obvious, but for the upstream basis plan to be successful, the appointive property must be of the character that has appreciated in value and is subject to the adjustment rules of Code §1014.^[23] For example, tax items that are characterized as income in respect of a decedent are not subject to the basis adjustment rules of Code §1014.^[24] Generally, assets characterized as §167 depreciable assets,^[25] capital assets, and assets subject to depreciation and recapture may be the best suited assets to include in an UBP structure.^[26] Other complex assets may require more analysis prior to including them in an upstream basis plan (such as qualified small business stock, qualified opportunity zone interests, or any other asset with special Code provisions related to income tax cost basis). As the UBP structure targets the application of Code §1014 to the tax attributes of particular assets, the careful planner will analyze each asset’s tax character separately in order to achieve the desired result.

• Included in Transferee’s Estate — Code §1014 applies a basis adjustment only to property acquired from a decedent.^[27] Code §2031 defines the gross estate of a decedent to include the value of all property to the extent provided in Code §§2033 through 2046.^[28] In the simple example, the transferee’s receipt of the gift during life would have resulted in the inclusion of the appreciated asset in his federal gross estate under I.R.C. §2033, falling square within the rules of I.R.C. §1014 for basis adjustment purposes. However, as noted in §II, Code §2041 also includes assets in a decedent’s estate to the extent of a general power of appointment over those assets.

• Retransfer — The upstream basis plan is somewhat frustrated if the donor (or an intended descendant or other targeted beneficiary) does not eventually receive the appointive property and related income tax advantage of the basis adjustment. To effect the intended result, the transferee should be a trustee subject to trust language achieving the overall intent of the original transferor and providing some assurances that, absent the exercise of the general power of appointment by the powerholder, the assets are ultimately held or disposed of as intended by the transferor. To satisfy this critical element — and minimize unintended risks of an outright transfer — this article suggests that an appropriate transferee should be a specially designed irrevocable (grantor) trust, carefully drafted to achieve the original transferor’s intent, maximize tax efficiencies, and provide flexibility for future planning.

While each of these elements are explored in more detail below in separate client-specific examples, the tax-minded estate planner evaluating an UBP structure will also need to understand the potential risks and issues as applied to each client.

Intentionally including assets in the powerholder’s estate should be carefully considered and it may be appropriate for the powerholder to have his or her separate legal counsel to advise them on how this planning will impact them. Further, in the event the powerholder is required to report included assets on his or her federal estate tax return, the powerholder will need to have access to valuation information for such included assets, and likely the participating parties will need to confirm consistent basis reporting. Ideally, the powerholder’s estate is under the federal filing threshold and not required to file an IRS Form 8971 (for basis consistency), but included appointive property asset information — and reported basis information — may need to be addressed by the powerholder’s personal representative, particularly where a state estate tax return filing is required. Fiduciaries in possession of appointive property may need releases to disclose asset information or have other authorizations under applicable corporate governance documents, if applicable, to share information with otherwise unrelated parties who may be required to report included appointive property. A practical solution to this concern is to specifically authorize the trustee of the trust granting the general power of appointment to provide information to the fiduciaries of any estate or trust of a powerholder, to the extent of the appointive assets are includable in such estate.

Risks and Planning Considerations: Traps and Planning Around Them

Historically, and absent very specific facts, estate planning attorneys have been very careful to limit powers of appointment to avoid estate tax inclusion under I.R.C. §2041(a), usually by falling within the exceptions provided in subsection (b).^[29] As the upstream basis plan specifically deviates from these exceptions to achieve an income tax advantageous result, the planner must carefully consider the risks of granting the general power to an upstream powerholder. One nearly universal trust planning feature is to provide in the trust instrument some independent trustee or non-fiduciary the ability to make changes to the trust agreement to account for unforeseen circumstances (many of which are discussed below). Relying on the independent trustee to act, however, creates its own issues. This section briefly touches on several of these risks and provides some drafting and planning concepts in an attempt to mitigate these risks going forward.

• Actual Exercise of the Power — As the grant of a general power over trust property is a right in the property subject to the power, the powerholder has the legal right to exercise such power over the appointive property to the class of permitted appointees. To fall within the provisions of §2041(a), the instrument need only grant the powerholder power to appoint assets in favor of the powerholder, his or her estate, his or her creditors, or the creditors of the powerholder’s estate (referred to in the following sections as an “inclusion power”).^[30] These exceptions under Code §2041(b) are disjunctive; any one of them is effective to implicate the necessary inclusion. However, a change in powerholder’s relationship with the donor or donor’s descendants, diminished capacity or influence, or other situations, likely warrant a curtailment to the inclusion power granted by the donor. To address these potential outcomes, the inclusion power should be strategically limited in scope and grant to the powerholder the narrowest class of potential appointees while causing the desired inclusion. For example, many practitioners draft the inclusion power only in favor of the creditors of the powerholder’s estate — a power that is fully sufficient to trigger the necessary inclusion under Code §2041, but unlikely to be exercised by the powerholder. The trust instrument may also allow the independent trustee the ability to modify the inclusion power or remove it entirely. If facts become known to the independent trustee, which would frustrate the UBP intent, having the ability to remove the inclusion power or further modify the inclusion power may provide the grantor’s beneficiaries a measure of comfort that the power will be used as intended.

• Creditor Claims Against Powerholder’s Estate — Granting the inclusion power in favor of the creditors of the powerholder’s estate may raise the question as to whether the creditors of the powerholder’s estate may make a claim over the property subject to this general power. Florida courts have held, however, that the general power of appointment is a “mere mandate or authority to dispose of property and not an interest in property itself.”^[31] Absent a property interest, or a powerholder’s exercise, the creditor should be unable to claim any interest in the appointive property. Even with this authority to support the inability to make a claim, the donor’s grant may consider express limitations as to identifiable creditors as appropriate. To avoid a situation in which the powerholder exercises in favor of a “friendly creditor,” the drafting attorney may desire to include definitional exclusions from the grant to a creditor of the powerholder’s estate, excluding spouses, partners, and even powerholder’s descendants, as appropriate.

• Change in Federal Estate Tax Laws — A significant reduction in the current federal estate tax exemption could adversely affect the UBP structure. In addition to an independent trustee or trust protector’s power to remove the powerholder’s inclusion power, the drafting attorney can provide in the grant language that it applies only if certain objective conditions are met, such as a grant only to the extent it does not cause additional federal estate tax in the estate of the powerholder, or specifically establishing an asset value limitation over the appointive property.

• State Estate Tax Inclusion — As noted above, several states impose a separate state estate tax. If the powerholder is a resident (or in some cases, non-resident with nexus to the particular state), the imposition of a state estate tax on the appointive property included in the donee’s estate under the general power of appointment may significantly reduce the overall tax advantages of the UBP structure. Similar to the potential change in federal transfer tax law, the planner may be able to mitigate this particular risk in the trust instrument by drafting that the grant applies only to the extent the power does not cause additional tax, and being careful to define “tax” to include state estate and inheritance tax in the powerholder’s estate.

• Change in Asset Values; Change in Asset Character — To be effective, the UBP structure necessitates that lower basis assets achieve a basis adjustment at the death of the powerholder. In the case of depreciable or amortizable assets, this result is somewhat assured. However, other lower basis assets may see changes in valuation that limit the tax advantage of the UBP structure, or may even result in a step-down in basis if the powerholder dies while appointive property basis exceeds the asset’s fair market value — eliminating embedded losses. Many grantor trusts contain provisions reserving to the grantor substitution rights,^[32] which may allow the grantor to substitute assets from the UBP trust for equivalent value. Moving the lower-valued assets back to the grantor may provide opportunity for those substituted assets to appreciate and avoid inclusion in the upstream powerholder’s federal gross estate. However, as the trust is a grantor trust to the donor, a practical trustee may consider realizing those losses currently and avoid the issue entirely.

• Lack of Authority on the Upstream Basis Plan Structure — The service has not directly challenged the UBP structure or issued any rulings indicating the service’s position as to whether, or how, such planning would be viewed. Although the regulations provide that a power may apply to select assets, or only over a limited interest in property, contingencies should be carefully analyzed.^[33] The service’s approach to interpreting I.R.C. §2041 (when inclusion is not a taxpayer-friendly result) may be illustrative.^[34] When a power of appointment is subject to contingencies, the power is effective only to the extent such contingencies occurred on the date of the powerholder’s death.^[35] A power exercisable only in the event a trust’s spendthrift provision was activated was not considered a power if such condition was not satisfied.^[36] Perhaps more analogous, in a private letter ruling, the service has held that a power to pay estate taxes only in the event such assets were included in the powerholder’s federal estate was not an exercisable power if no such inclusion took place (the tax-specific limitation was effective).^[37] There is also substantial authority that formula provisions have been held appropriate in marital and charitable deduction planning.^[38] Although not directly on point, it would seem that the service would be arguing against settled precedent to take a position that formula clauses are not recognized when applied to an upstream powerholder. To provide more substance to the inclusion power, the drafting attorney may consider adding the powerholder as a current discretionary income beneficiary, giving the powerholder a present beneficial interest in the UBP trust. As the independent trustee may provide flexibility in connection with the inclusion power, it may also be appropriate to allow that independent trustee to modify or terminate the powerholder’s beneficial interest should issues arise during the UBP trust’s administration.

Although not expressly approved by the service, many commentators and planners may find some degree of comfort that the UBP structure is not a novel concept. Many planners and practitioners have written and lectured extensively on this topic.^[39] While the lack of service’s direct authority on the UBP structure should be considered, the well settled principles of federal tax laws as historically applied, should control.

Permanent Planning: Where Estate and Income Tax Planning Intersect

The upstream basis plan is unlikely to be broadly implemented in most estate plans mainly due to the critical requirement of a trusted upstream powerholder without significant assets of their own. The vast majority of the other risks, discussed above, may be mitigated with careful drafting, together with an attentive independent trustee or trust protector. For the right client, being able to shelter significant capital gains while using an otherwise wasted federal estate tax exemption may provide lifetime beneficiaries with planning flexibility upon the death of the upstream powerholder. With the now permanent exemptions, the estate tax basic exclusion amount should be regarded by the tax planning advisors as an additional tool, at least until the next change in the federal tax law becomes “permanent.”

This column is submitted on behalf of the Tax Section, J.J. Wehle, chair, and Charlotte A. Erdmann, editor.