Rich Americans are dodging capital gains taxes by gifting their booming assets to their parents and inheriting them back before cashing out. But is this trick even legal?

According to a Business Insider report, some Americans have discovered this loophole and are making use of it. They're taking advantage of Section 1014 of the Internal Revenue Code, also known as a step-up in basis. This technique can potentially save thousands in taxes, but there are a few huge risks and downsides to be aware of.

How can gifting assets to your parents allow you to save on taxes

If you're a wealthy young American and you expect to make a substantial profit on the sale of assets like stocks or real estate, here's how gifting those assets to your parents could help you save a fortune.

When you gift assets to your parents, you can usually do so without paying taxes on the transfer. You can make a tax-free gift as long as it's valued below an annual limit, which is $19,000 per recipient in 2025. If you make a gift above this amount, it counts towards your lifetime gifts and estate taxes exclusion, which is $13.99 million in 2025 but is set to drop to 2017 levels, adjusted for inflation, in 2026.

After gifting the property to your parents, you can inherit the assets back when your parents die. If the parents die a year after the initial transfer, the step-up in basis comes in. Although the rules can be a little complicated, the basic gist is that when someone dies and leaves assets to heirs, the "cost basis" readjusts to the fair market value on the date of the death.

So, if you gave stock worth $36,000 to your mom and dad today, you could transfer it tax-free by giving them each $18,000. Say the stock went up in value and was worth $336,000 by the time your second parent died in 20 years, the "cost basis" would reset to $336,000. If you sold the stock for $340,000 at that time, you'd only have to pay capital gains taxes on $4,000. Estate taxes would only be a concern if their estate crosses the threshold.

This technique may work well for wealthy entrepreneurs who have stock in their company that may initially be worth very little but that may increase in value dramatically over time. However, these rules apply to many other kinds of assets too, so rich young people can do it with any assets they think will go up over time.

There are some huge risks to this approach

While this approach can provide significant tax savings, it's not without risk.

One big issue is that your parents would own the assets — so they could cash out the stocks and use the money, or could allow other heirs to inherit them and not actually leave anything to you. The assets could also be lost if your parents have creditors coming after them.

There's also a problem if your parents need nursing home or long-term care. Medicare and private insurance won't pay for it and Medicaid requires them to spend down their assets before they can qualify to get their care covered. This would include spending your assets that you transferred to them.

There's also the chance estate tax rules could change unfavorably before your parents pass, so you could get hit with those taxes. If you live in a state that imposes inheritance taxes, you may also have to pay that.

Carefully consider these risks before you move forward. While saving on capital gains taxes sounds great, losing your money because your parents must pay for a nursing home may not be what you desire. Be sure to talk with a financial professional about the risks, and about safer alternatives, before you send those gifts to Mom and Dad.