Parents' $15M estate exemption can erase capital gains tax

Parents' unused $15 million estate exemption can be redirected through a testamentary general power of appointment to step up the basis of a child's appreciated real estate at death, eliminating capital gains tax that could otherwise reach hundreds of thousands of dollars.

The strategy was detailed by estate planning attorney Jeffrey M. Verdon, lead partner at Verdon Law Group, in a Kiplinger feature. Under the arrangement, a property owner grants parents the right to exercise a TGPA through their wills. If the power is never exercised, the underlying property remains with the owner — but the covered assets are still included in the parents' estate for federal tax purposes at death.

The mechanics are straightforward in a worked example. A property purchased for $200,000 that has appreciated to $2 million, with years of depreciation deductions driving the tax basis far below the original cost, would receive a step-up in basis to $2 million at the parent's death. A subsequent sale would trigger no capital gains tax. The federal estate tax exemption stands at $15 million per person and $30 million per couple, according to the Kiplinger report, which cites IRS guidelines.

For high-net-worth individuals holding long-term real estate or other appreciated investments, this approach can convert what might otherwise be a seven-figure tax liability into a non-event. The strategy also provides a fresh depreciation basis if the owner keeps the property, allowing new deductions against rental income.

How the TGPA works

The TGPA is a specialized estate planning tool that lets a taxpayer grant powers to other beneficiaries without exposing the underlying property to risks the grantee may face. In this application, the child grants parents the right to exercise the power through their wills. If the parents do not exercise it, the property remains with the child — but the assets are still treated as part of the parents' estate at death, triggering the step-up in basis.

The key benefit: even if the parents never exercise the power, the tax basis of the covered assets resets to fair market value at their death. This is particularly valuable for real estate investors who have claimed depreciation over decades, leaving their tax basis artificially low relative to current market value.

Without this planning, the owner faces two unappealing options when selling: paying capital gains tax based on the low original value, or engaging in an IRC Section 1031 tax-free exchange to defer the gain into another property. The TGPA strategy offers a third path that eliminates the tax entirely rather than deferring it.

Who can benefit

The strategy is most effective when parents have estates well below the exemption threshold. If a parent's estate is under $15 million, the unused exemption would otherwise be wasted at death. By structuring a TGPA, that unused exemption can be redirected to benefit the child's appreciated assets.

The approach works for real estate and other valuable investments. For rental property owners, the step-up in basis also creates a new depreciation schedule that can offset rental income for years to come — an additional tax benefit beyond the capital gains elimination.

Working with an estate planning attorney is critical to set up the TGPA correctly. The strategy requires careful drafting of wills and trust documents to ensure the power is properly granted and the tax consequences are as intended. Tax exemption thresholds and rules can change; readers should verify current figures against the latest IRS guidance.

This article is for informational purposes only and does not constitute investment advice.