No. of Recommendations: 2
On Fri, 18 Apr 97 09:49:21 -0600, Maggy wrote:

My father-in-law has just announced he will begin to reduce his future estate taxes by giving each child and grandchild $10,000 in stock each year.

I think his original cost basis in those stocks is passed on, so isn't it better for him to give out the stock with the least appreciation. For example he has some IBM he bought in the 60s which he has said he 'cannot' sell because he has too much capital gains. Wouldn't it be better to keep that in his estate, because at his death (which we hope is a long way off!), the original cost basis is erased and a new cost basis is established?



In the Taxes Q&A area (you can find this via the Fools School area), you will find a number of issues that may be of importance to you. One of the issues that were discussed there has to do with the gift of appreciated securities, and the tax ramifications thereof. I'll repost it here for your reading pleasure:

A number of questions have come up about gifts of stock. Let's kick this one
around a little bit.
If you receive (or give) stocks as a gift, you MUST know (or provide) the
following information:
1. The donor's (i.e., the person who gave you the stock) tax basis (or cost) of
the stock.
2. The Fair Market Value (FMV) of the stock at the date of the gift.
3. The amount of the gift tax paid by the donor, if any.
Why do you need to know all of this? Because YOUR basis in the gifted
stock will depend upon the donor's basis and the FMV at the date of the gift.
The rules are as follows:
1. If the FMV of the stock is LESS than the donor's basis at the time of the
A) Your basis for gain is the same as the donor's adjusted basis.
B) Your basis for loss is the FMV at the time of the gift.
C) If you use the donor's basis to compute a gain and get a loss, and then use
the FMV to compute the loss and get a gain, here is neither a gain NOR loss.
2. If the FMV of the stock is MORE than the donor's basis at the time of the
gift, then your basis is the donor's basis. If the donor was required to pay gift
tax, your basis is increased by the amount of gift tax paid that is attributable to
that gift.
Let's talk for a minute about gift tax issues. You can give $10,000 to any
person. The gift is not deductible by you, nor taxable to the recipient. If the gift
is $10,000 or less, you don't even have to file a gift tax return, much less
worry about gift taxes. If you're married, you can "gift split." That is, you can
give $10,000 to one person, and your spouse can give $10,000 to that same
person. In effect, you have transferred $20,000 worth of wealth to the same
person without having any type of estate tax or gift tax filing problems.
Let's look at an example of gifting stock. Dad buys 100 shares of XYZ stock
for $5 per share on January 15, 1995. Then Dad gifts the stock to you on
April 4, 1996. On the date of the gift, the stock was valued at $15 per share.
You then receive the stock, and sell it on April 8th for $15 per share. Your
capital gain is long-term, even though you only held the stock for a few days.
This is because when you are given a gift, not only are you forced to keep the
donor's basis, but you also keep the donor's holding period. So this
transaction would be reported on Schedule D, using a purchase date of
1-15-95, a sale date of 4-8-96, and a long-term gain of $1,000.
Another example: You bought 500 shares of XYZ at $20. The stock is now
worth $30 per share. You want to help Mom buy a car, pay off a loan,
whatever; so you gift 300 shares of stock to Mom. You have gifted stock
worth $9,000 (300 X $30), so you are under the $10,000 limit. The basis of
the shares in Mom's hands is $20 per share. If she turns around and sells the
stock for $30, she will have a gain of $3,000 (300 X $10) that will be taxable
to her. This is a good example of "income shifting." This works really well if
Mom is in a lower tax bracket than you. By giving Mom stock and letting her
sell it, she will receive much more money "after taxes" than if you gave her the
cash after you sold the stock and paid your taxes. This type of income shifting
also works well for children, but be aware of the kiddie tax issues.
And please, make sure that you don't confuse gifts with charitable
contributions. They are two totally different animals with different sets of rules
and regulations.

And as was previously pointed out, there may be a better way for your dad-in-law to reduce his estate, other than the gifting of appreciated securities. In fact, the gifting of these securities may be one of the WORST ways to reduce his estate tax liabilities. I would strongly suggest that your dad-in-law visit a qualified estate planning professional in order to review the various other options that he may have before he goes off half cocked and begins to give away his appreciated securities.

TMF Taxes
Roy Lewis
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