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.
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