Grandchildren are often a big part of estate planning, as there are certain advantages to passing assets along to the youngest generation in the family. For individuals who have owned blue chip stocks with high values for several decades, when and how to gift these stocks requires a detailed analysis of the tax implications.
What are the ramifications for taxes and/or cost basis if you gift these to the grandkids by changing ownership? If a grandparent does this while he or she is still alive, how does this shake out as far as taxes and cost basis for the recipients—or should he pass the stocks upon his death?
A recent New Jersey 101.5 article, "Tax differences between gifted or inherited stock," explains that there are several options—all with some ramifications. However, some may be more attractive than others.
Before examining the choices, first let's review cost basis and the capital gains tax. The cost basis is the price that you paid to purchase the stock in addition to other costs like commissions and fees. When the stock is sold, 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If the stock is in a qualified savings account (an IRA, 401(k) or 529 plan), it would be taxed only when withdrawn.
If a stock is held for more than one year, it's considered to be long-term. These are taxed at lower rates than ordinary income. Long-term capital gains are taxed based on the taxpayer's tax bracket.
If a grandparent gifts the shares to the grandkids, the grandkids will have the same basis as the grandparent and upon the sale of the stock, will pay a capital gains tax just as the grandparent would.
Gifting shares while a grandparent is still alive will not get rid of the capital gains when the stock is sold.
If, however, the grandparent left the stock to the grandchild after death, the grandchild’s basis in the stock is “stepped up” and becomes the fair market value of the stock at the time the grandparent died. Leaving the stock to the grandchild after death will often dramatically reduce any capital gains associated with highly appreciated stock.
Speak with an experienced estate planning attorney to explore all of the options that are available and determine which one best suits your estate and your family.
Reference: New Jersey 101.5 (March 3, 2016) "Tax differences between gifted or inherited stock"