Financial Gifts: Is it Better to Give Cash or Stock? by Carrie Schwab Pomerantz on Creators.com

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Financial Gifts: Is it Better to Give Cash or Stock?

Dear Carrie: I'm 75 and would like to give my three grandchildren a financial gift. I'm trying to decide if it would be better to give each of them cash or some stock that I've been holding for years. What do you recommend? — A Reader

Dear Reader: This is a great question — and a great time to ask it — because certain capital gains tax legislation that's due to expire after 2010 could have an impact on your decision. Of course, the first consideration is whether your grandkids have an immediate need for cash or might benefit more from future stock appreciation. But on top of that, determining the most favorable tax situation for both you and the kids is a big part of whether it's better to give cash or stock.

As always, when it comes to specific tax questions, it's best to consult your accountant or tax adviser. But I can give you some points to consider.

WHAT'S BEST FOR YOU?

Start by looking at your own financial situation from both an income tax and estate planning perspective. Here are some things to think about:

— Has the stock appreciated since you bought it? If it has, by selling the stock and giving the cash to your grandkids, you'd realize a gain on the sale and have to pay capital gains taxes. In this case, it might be best to give them the stock. If the value of the stock has gone down, it would make more sense to sell the stock, realize a capital loss for yourself, and then gift the cash.

— Does the stock have the potential to grow significantly? If so, giving it to your grandkids is one way to reduce your taxable estate. Any future appreciation would be removed from your estate and transferred to them — a potential double benefit of lowering estate taxes and increasing the value of your gift down the road.

POSSIBLE TAX CONSEQUENCES FOR YOUR GRANDKIDS

From your grandkids perspective, receiving a stock gift can have tax consequences for them. When you give them stock, they assume your cost basis as well as your holding period. (Less than a year is short term; more than a year is long term.) As an example, let's say you bought the stock five years ago for $10 a share and now it's worth $20 a share. You decide to give it to your grandkids, and it goes up another $5 a share.

If they then sell the stock, they will owe long-term capital gains taxes on $15 a share.

On the other hand, inherited stock is valued at the date of death, possibly raising the cost basis and lowering the tax liability. And inherited stock always has long-term status, even if the deceased purchased the stock just a day before their death.

CURRENT LONG-TERM CAPITAL GAINS TAX RATES

Your income tax bracket and that of your grandkids could also figure into your decision. Right now, taxpayers in the 25 percent (or higher) bracket pay a long-term capital gains rate of 15 percent. But through the end of 2010, for taxpayers in the 10 percent and 15 percent tax brackets, the long-term capital gains rate is 0 percent. (Current law states that it will revert to 10 percent after 2010.) So if your grandkids are in the lower tax brackets and you're planning to make your gift in the near future, giving them appreciated stock they could sell in 2010 — realizing a tax-free gain — could very well be the best solution for all of you.

And even if they don't sell it right away, if the kids are young and in a very low tax bracket, a stock gift might make the most sense.

WHAT YOU CAN GIVE TAX-FREE

Remember, too, that you can currently give up to $13,000 each year to any number of individuals without paying a gift tax. This applies whether it's cash or stock. If you give over $13,000 to one individual in any one year, you will need to report the gift, although you won't have to pay a gift tax until your total gifts exceed $1 million.

BEYOND MONEY

As I said earlier, whether you choose to give stock or cash may ultimately depend on your grandchildren's current financial needs. But either way, they're very lucky that you want to help them. I'd also encourage you to help them learn how to handle your gift, explaining the principles of long-term investing. Whatever their ages or financial circumstances, talk about what this gift means, how they might use it, and the importance of saving and planning for the future. The gift of your knowledge and experience can be just as valuable as money.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.