One of the greatest joys for parents and grandparents is providing for their children and grandchildren - helping them succeed or survive difficult financial times when necessary. Making a financial gift sounds easier than it is, however. Here are the three most important questions you should ask yourself before making a gift.
This seemingly obvious question is often overlooked or ignored, yet it should be determined in advance. Parents want to see their children succeed, and this concern often outweighs consideration for their own finances. It is a well-known law that gifts up to $10,000 per recipient can be made by a grantor during any calendar year. The limit is not on the number of recipients to whom you give during the year; it is on the amount that you can give to any one individual. So, if you have five children, you can give $50,000 during the year. If you exceed this amount, then gift taxes could be owed.
In addition to the property itself, the recipient (donee) of the gift also receives the donor's tax basis in the property. This is an important distinction from transfers of property at death or upon a sale where the transferee receives a stepped-up basis equal to the market value of the property at the time of the transfer. The higher the basis, the lower the gain that will be realized upon the sale of the property.
Selecting the right property to give is another important decision. If part of the aim of gifting is to reduce estate taxes, then choose property that you expect to appreciate in value substantially. That way, you give at a time when the value is low and avoid estate taxes at your subsequent death, when the value is much higher (assuming that it does, in fact, appreciate). Property that will not be sold by the donee should also be used for gifting because the stepped-up basis will be irrelevant. Finally, consider gifting property that is generating a high income to shift the income tax burden to the donee.
There are also properties that shouldn't be given away. For instance, property with value that is expected to decrease and property that the grantor intends to use after gifting are a last resort. Transfer of U.S. savings bonds may provide an unsuspecting grantor a shock: Gifting these bonds triggers the immediate recognition of the untaxed appreciation.
Timing is the final important consideration in developing a gifting strategy. If you anticipate making a gift, then try to time the gift so that it is made during a dip or low point in the market. Even deathbed gifts are allowed and should be considered to reduce federal estate taxes.
There is much more to gifting than handing your child or grandchild a check. Let's see how the rules work for a specific question from one of our readers:
Q: I have accumulated a nice portfolio of Baby Bell stocks that I acquired when the Bell company was broken into parts. I would like to pass these stocks to my 10 grandchildren, to help fund their college study. What is the safest and most effective way to give these stocks equally to my 10 grandchildren?
A: Gifting during your lifetime is very easy. Just give each of your grandchildren the same number of stocks now. They will not have to pay income taxes on your gift, and you will not have a gift tax as long as each grandchild receives $10,000 or less ($20,000 if you and your wife can make gifts to them) each year.
If your stock is held in an account with a brokerage firm, then contact your broker to make the arrangements to issue stock certificates to your grandchildren. If you hold the stock certificates, then consider working with a broker to have them transferred to your grandchildren.
If you want to leave your grandchildren more at your death, then you must specify your intentions in your will. You can leave a specific number of shares to each beneficiary, or you can direct your personal representative to distribute them in the fashion that you envision. Have an attorney prepare the document for you to be sure that it is done right. After all, you did ask for the safest way.
(Jeff Fleming is a certified financial planner and an attorney.)