As with most issues, it depends.
Say you own two blue chip stocks worth $100,000.
They have been very good to you over the many years, paying regular dividends and appreciating quite nicely in value.
You now have grandchildren who are the proverbial apples of your eye.
Consequently, you are considering a transfer of this stock to those grandchildren while you are alive.
For our discussion, we will assume that such transfer would not trigger any gift taxes because the gift will be made among eight grandchildren (i.e., 8 x $14,000 = $112,000).
This is well within the $14,000 you can gift to each grandchild per year.
Is this a good idea?
A recent New Jersey 101.5 article considered this very question in "Tax differences between gifted or inherited stock."
After all, we do not live in a perfect (or tax neutral) world.
First, an understanding of cost basis and the capital gains tax is in order.
The cost basis is the price you originally paid for the stock. along with other attending acquisition costs like commissions and fees.
When the stock is sold, the resulting tax liability is calculated based on the cost basis and the sales price.
If the stock is sold for more than the original cost basis, the difference will be taxable as a capital gain in the year of the sale.
If a stock is held for more than one year, then it is considered to be long-term.
Long-term capital gains are taxed at lower rates than ordinary income, based on the taxpayer's tax bracket.
If you gifts the shares to your grandchildren, then another factor to consider is their respective ages.
For minor children, the shares would need to be held in "custodial" form, but any adult grandchildren would own their shares directly.
Gifting shares while you are alive will not eliminate any capital gains taxation when the stock is sold.
Translation: Your grandchildren would not only receive the stock from you ... but your basis in it!
When the stock is sold, it is taxed just as if you sold it.
But they will be in a lower tax bracket, right?
Likely yes, for those who are adults and just getting started in the work force. In addition, the overall capital gains tax will be spread among eight different taxpayers.
So far, so good.
Problem: What about any grandchildren who are under age 19 or full-time students under age 24?
Result: Some of the tax rate on the sale of the stock may be taxed at their parent's tax rate.
What is this called?
Have you ever heard of the "kiddie tax."
The kiddie tax rules are pretty complex, but as a general rule, children under 19 or full-time students under 24 can exclude the first $1,050 of unearned taxable income from their tax return.
The next $1,050 is taxed at the child's rate. Anything more than that amount is taxed at the parent's tax rate.
So, depending on the specifics, there may be little or no tax savings to be gained by giving the stock to your grandchildren.
In fact, a higher tax rate might be paid if the tax brackets of their parents are higher than yours.
Alternatively, if you leave the stock to these same grandchildren through your estate plan, then your grandchildren would inherit the stock with a cost basis equal to its value at the date of your death.
In addition, your executor may elect to value your entire estate nine months later. This is called the "alternate valuation date."
Either way, this postmortem transfer results in what is know as a stepped-up basis on the appreciated stock.
Bottom line: There is more to meet the eye tax-wise when it comes to this "give now" versus "leave later" decision.
In the meantime, cash is always an appropriate asset for gifting. It is always the right color, fit and style, too.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: New Jersey 101.5 (March 3, 2016) "Tax differences between gifted or inherited stock"