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What to consider when gifting appreciated stock?

Investing in individual stocks can diversify your financial portfolio. Warren Buffett’s four principles are to look for shares in a business you understand with good long-term prospects, operated by competent and honest people and at an attractive price.

This might mean opting into a company discounted stock purchase program or picking up a couple quality stocks. If you started investing years ago, you may have an E*TRADE or an Edward Jones account with an appreciated portfolio. What happens if you want to give appreciated shares to a family member?

 

When a child is starting out

Here is an example to better illustrate: Bob and Karen are teachers and have always liked Apple products. In 2008, they purchased $10,000 of AAPL stock. This was around the last downturn and the price seemed affordable for a company with good long-term prospects.

They made a wise investment and today their stock is worth nearly $80,000. Their daughter, Katherine, would like to start a coffee shop in Cherry Creek. They are looking for ways they can help her get the venture off the ground. Katherine just graduated from business school in the spring, she expects to earn about $30,000 for the year.

If they give her half the appreciated APPL stock, will she have to pay capital gains taxes on the increase in value - $35,000? The likely answer is no. 

While she receives the shares with the original cost basis (what her parents paid for the Apple Inc. stock in 2008), the tax reform package indexed capital gains tax to investor income. For a single filer with income under $38,600, an investor pays zero percent for investments held longer than a year. Higher-income earners generally pay either 15 and 20 percent on capital gains.

What about gift taxes? The annual gift tax exemption is $15,000 in 2018. For a married couple, the figure doubles to $30,000. However, they may still need to file a gift tax return even if no tax is due (Form 709).

If an adult child is in mid-career

In other situations, when an adult child is earning a comfortable income, a gift of appreciated stock might not be the best route.

This is when it's important to consider that inherited assets transfer with a stepped-up basis. This means if you purchased a stock at a share price of $10 in 1995 and it is worth $100 at your death, an heir pays capital gains only on any increase above $100 when it is sold.

Because myriad family situations exist between these two scenarios, seek individualized counsel from an estate planning attorney before making a major inter-family gift. Often the legal counsel pays for itself over the long term and it may even provide the impetus to complete or review an out-of-date estate plan.

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