Dear Carrie: I would like to gift a portion of my stock to my daughter. Do I have to sell it first, or can I simply gift it in the amount allowed this year? Also I want her to hold on to it until she retires or has a real need for the money. Is that possible? — A Reader
Dear Reader: This is an excellent and somewhat complicated question because it deals with several issues: capital gains taxes, gift tax rules and financial control. I could probably write a complete column — or even a book — on the intricacies of each! So while I can't go into a lot of detail here, I can give you some general guidelines with the caveat that you really should talk to your financial advisor, tax professional and perhaps even your estate planning attorney before making your gift.
That said, I applaud your intention to help your daughter financially. Here are some things to consider as you decide how best to go about it.
Yes, You Can Gift Stock Directly
Probably the simplest part of my answer is that you don't have to sell a stock to make a gift. You can transfer it directly from one brokerage account to another. You don't mention your daughter's age, but even if she were a minor, you could open a custodial account for her and make the stock transfer. Keep in mind, however, that this gift would be irrevocable, and that she will have full control over the assets at the age of majority (which can differ by state). If she's older and already has a brokerage account, check with your own financial institution on the process for making the transfer to her account.
But First, Consider Capital Gains Taxes
Your decision whether to sell the stock and give your daughter the proceeds or transfer the shares to her isn't just about process. An important consideration is how you'd each be impacted by possible capital gains taxes.
Here are a couple of 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 daughter, you'd realize a gain on the sale and have to pay capital gains taxes. In this case, it might be better to give her the stock. You will want to compare your income tax rate (including state income tax rates) to your daughter's in order to determine which one of you has a lower income tax rate. However, if the value of the stock has gone down, it might make more sense to sell the stock, realize a capital loss for yourself and then gift the cash to your daughter.
— What are the possible tax consequences for your daughter? When you give stock, the recipient assumes 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 give your daughter $10,000 worth of stock that you purchased 10 years ago for $2,000. If she sells it immediately, she'll owe long-term capital gains taxes on the $8,000 profit.
Another choice is to hold off and bequeath the stock to your daughter in your will. In that case, the recipient's cost basis is the full market value at the date of death. That could lower your daughter's tax liability. It is also important to note that inherited stock, regardless of when it was first obtained by the deceased, is always treated as "long-term" property.
Be Aware of Gift Tax Rules
Because of high gifting limits, you may not have to worry about gift taxes, per se, but there are rules that you need to be aware of regarding reporting. In 2018, an individual can gift up to $15,000 to anybody — and any number of people — without having it count against their lifetime exemption or even having to report the gift. A married couple who is "sharing" gifts can give up to $30,000 without having it count against their lifetime exemption, but they do have to report the gift. This applies to cash or stock. So if the fair market value of the stock you give your daughter is $15,000 or less at the time you give it to her, there's likely no filing required.
If you give her more than $15,000 in a single year, you'll need to report the gift, and it would apply to your lifetime exemption. However, with the current $11.2 million lifetime exemption per person, it's only the extremely wealthy who have to be concerned about actually paying a gift tax.
Set Up a Trust for More Control
I can certainly understand your desire for your daughter to hang on to the stock until her retirement or some specific financial need. However, if you give it to her as a gift, it's hers to use as she pleases. While you can express your wishes to her, the only way to assure a certain amount of control over when she accesses the money would be to set up a trust that limits distributions.
Talk to Your Daughter — and Your Tax Advisor
To me, the best thing to do would be to have a frank conversation with your daughter about your plan and your wishes, then talk to your financial, tax and estate planning professionals. In fact, if you're comfortable with the idea, why not set up a meeting with your financial advisor and your daughter so that the three of you can discuss the best way to proceed? It could be a great opportunity to enhance your daughter's awareness of the importance of smart money management and retirement planning, as well as a way to reassure yourself that your gift will be most effective.
Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of "The Charles Schwab Guide to Finances After Fifty." Read more at http://schwab.com/book. You can email Carrie at [email protected] The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning 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.
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