NEW YORK — Now is a good time to give stock to family members who can hold onto the gift until the shares are worth more. A parent or grandparent can give away more for less.
Federal gift and income taxes should get serious thought, though, before choosing which shares to give or how to give them. Taxes may make it smarter to sell a stock and give the cash instead, or to set up a trust to hold the shares.
It is especially important now, when many stocks have lost value, to weigh the tax consequences of giving.
Many people who make gifts ignore taxes until they sit down with an accountant at the end of the year, says Stefan F. Tucker, a partner in the Washington, D.C., office at Venable LLP. Instead, clients should “think about taxes early and often.”
The key is to analyze the interplay between gift, estate and income taxes, according to Tucker.
Federal gift tax rules currently let an individual give an unlimited number of gifts up to $13,000 ($26,000 for couples) per recipient, free of gift tax.
Separate from the $13,000 gifts, each person can give away up to $1 million free of gift tax during a lifetime. This may be a good time to use up some of that lifetime exemption, according to estate planners.
When is it smarter to sell shares and give the cash instead? Often, it’s when the stock has lost value since the owner bought it. The idea is for the donor to take a tax loss rather than passing shares to someone who can’t use it at all.
When shares are sold at a loss, the tax cost is the lower of the donor’s tax cost or the value at the time of the gift. So, if shares cost $100,000 but are worth $50,000 at the time of the gift and are later sold by the recipient for $50,000, no loss can be taken.
The donor can benefit by taking the loss. Here’s an example provided by Tucker: A man gives $50,000 from the sale of stock that he bought at $100,000 to his daughter and takes a capital loss of $50,000; the loss yields a federal income tax savings of $7,500 (15% — the current top capital gains rate — times $50,000) when used to offset a capital gain.
This leaves $7,500 in the man’s pocket after he gives away the $50,000. If the man and his daughter decide the sold stock is a good long-term investment, they can buy more. The amount of the gift over $13,000 would go against the man’s $1 million lifetime exemption.
Understanding how cost basis works is important in figuring out the tax aspects of a gift of stock.
The person who gets a gift of stock gets the donor’s cost basis in the shares. (The exception is when the gift is big enough to generate gift tax; then, a portion of the gift tax is factored into the new cost basis.)
The donor also passes his or her holding period for the shares along. So, if he or she held it for 36 months, the recipient is also considered to have held it that long.
The idea of gifting while stocks are priced cheaply is generally for the recipient to hold the stock and get the gains. Current low capital gains tax rates can benefit a family member who ends up selling a gift soon, however.
Rande Spiegelman, vice president of financial planning at the Schwab Center for Financial Research notes that a person who sells a gift of stock soon after receiving it could end up paying tax at a much lower rate (as low as 0%, depending on the bracket) than the donor would owe.
Many wealthy people set up special trusts to reduce the tax hit on gifts. A common vehicle for this is the grantor trust for income tax purposes.
The donor gives stock to the trust, and pays all the income tax on income it generates. This way, the property given to the trust isn’t diminished by taxes paid when the stock is sold.
A parent who just wants to make a $13,000 gift to a child would probably not bother with the trust for a single gift of that size, says Dan Schrauth, a wealth adviser in the San Francisco office at J.P. Morgan Private Bank.
However, setting up a trust isn’t particularly complicated or expensive, so it can pay to have one to receive gifts of stock over the years, says Schrauth.
By Arden Dale
A DOW JONES NEWSWIRES COLUMN
