Transferring Daughter's Funds to Her Efficiently

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R2
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Transferring Daughter's Funds to Her Efficiently

Post by R2 » Wed Nov 06, 2019 7:54 pm

My wife and I have been saving money gifted to our daughter since early childhood. We have been saving her money in our taxable account at Vanguard in a LifeStrategy fund.

Now that she is 20, we would like to start transferring those funds to her. She is a student and has low income, and is not receiving financial aid.

Can we simply gift her shares of the fund directly? What are the tax implications?

We could choose to give her the cash value of the shares, but would then "own" those shares at our higher tax basis.

Any suggestions?

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RickBoglehead
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Re: Transferring Daughter's Funds to Her Efficiently

Post by RickBoglehead » Wed Nov 06, 2019 7:56 pm

You can gift her the shares, and she will owe tax when selling.
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R2
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Re: Transferring Daughter's Funds to Her Efficiently

Post by R2 » Wed Nov 06, 2019 7:59 pm

Will she owe tax at her rate, or ours?

Silk McCue
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Re: Transferring Daughter's Funds to Her Efficiently

Post by Silk McCue » Wed Nov 06, 2019 8:02 pm

Hers. Your basis is her basis.

Cheers
Last edited by Silk McCue on Wed Nov 06, 2019 8:02 pm, edited 1 time in total.

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RickBoglehead
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Re: Transferring Daughter's Funds to Her Efficiently

Post by RickBoglehead » Wed Nov 06, 2019 8:02 pm

Hers.
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HomeStretch
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Re: Transferring Daughter's Funds to Her Efficiently

Post by HomeStretch » Wed Nov 06, 2019 8:05 pm

I don’t believe you need to “gift” the funds to her as they are her funds even if held in your account rather than a custodial account. That said, whether it is a gift or not only matters if the amount is high enough to require Form 709.

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R2
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Re: Transferring Daughter's Funds to Her Efficiently

Post by R2 » Wed Nov 06, 2019 8:07 pm

Thanks, Rick.

Appreciate prompt response!

Is there any problem with me two give two "gifts" of shares over two years to not exceed the yearly limit?

Makefile
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Re: Transferring Daughter's Funds to Her Efficiently

Post by Makefile » Wed Nov 06, 2019 8:07 pm

From the daughter's perspective it would be better to receive the cash even if she turns around and immediately invests it in the same fund.

The position is bound to have a lot of pre-2012 "non-covered" shares where Vanguard has not kept track of the cost basis of each purchase of shares and dividend reinvestment. Of course, if the entire position will be sold anyway in the same year, this would not matter if you know the average cost.

Also a question for those saying transfer the shares for taxation at her rate, although without knowing the amount of the capital gain, wouldn't kiddie tax (investment income taxed at estate & trust rates) come into play since she is a full time student?

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Peter Foley
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Re: Transferring Daughter's Funds to Her Efficiently

Post by Peter Foley » Wed Nov 06, 2019 8:39 pm

If your daughter is 20 and is a full time student, selling appreciated shares of a stock or mutual fund might require her to pay tax on that sale. If there are even relatively modest profits, her tax at the "kiddie tax" rate might be higher than the tax you would pay on long term capital gains.

There are ways around the "kiddie tax" such as selling small amounts each year. Your really should look into the "kiddie tax" rates (they are the same as estate tax rates) and use that as a guide regarding the option of gifting appreciated shares or you selling and gifting cash.

Gill
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Re: Transferring Daughter's Funds to Her Efficiently

Post by Gill » Wed Nov 06, 2019 8:44 pm

How is this a gift? You are returning assets to her that have belonged to her all along. How did it end up in your name?
Gill
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JimInIllinois
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Re: Transferring Daughter's Funds to Her Efficiently

Post by JimInIllinois » Wed Nov 06, 2019 10:01 pm

R2 wrote:
Wed Nov 06, 2019 8:07 pm
Is there any problem with me two give two "gifts" of shares over two years to not exceed the yearly limit?
No problem, but you could also split the gift between you and your wife (the limit is per recipient per giver).

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R2
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Re: Transferring Daughter's Funds to Her Efficiently

Post by R2 » Thu Nov 07, 2019 7:39 pm

OP checking back.

Very good information from Peter Foley from Wobegon. He is truly over average.

I looked into the kiddie tax, and it looked like it was crafted to prevent the transaction that I was considering.

I was previously planning to gift the shares (not really a gift, as it is her money) so she could redeem at her tax rate, and reimburse her the taxes.

I now plan on "giving" her the cash in amounts to not trigger a gift tax. (I would have no proof that this is not a gift, so am treating it as a gift.)


Some backstory to answer some other questions . . .

I have been depositing money gifted to my daughter since birth. It is truly her money, so it's not really a gift. The amount is more than the gift limit, but will be providing her the money in increments less than the gift limit to avoid any improper appearance.

dbr
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Re: Transferring Daughter's Funds to Her Efficiently

Post by dbr » Thu Nov 07, 2019 9:54 pm

The annual $15,000 exclusion per donor is the point at which a gift tax filing is required. The lifetime exemption for you before any tax is due for gift and inheritance tax is $11,400,000. Some states may have different limits regarding state tax.

It isn't clear if this is money gifted to the child by people not yourself and just conveniently deposited by you in an account in your name or whether this is your own money that you have been mentally tagging to give to her at some point. In either case once she has the assets kiddie tax applies. I am imagining that gift tax requirements for you do not apply if the original money is from someone else, though that situation is muddied if the assets have been diverted through you. It might be there have been two stages of gifts in that case.
Last edited by dbr on Thu Nov 07, 2019 10:04 pm, edited 1 time in total.

GUtiger
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Re: Transferring Daughter's Funds to Her Efficiently

Post by GUtiger » Thu Nov 07, 2019 10:04 pm

R2 wrote:
Thu Nov 07, 2019 7:39 pm
OP checking back.

Very good information from Peter Foley from Wobegon. He is truly over average.

I looked into the kiddie tax, and it looked like it was crafted to prevent the transaction that I was considering.

I was previously planning to gift the shares (not really a gift, as it is her money) so she could redeem at her tax rate, and reimburse her the taxes.

I now plan on "giving" her the cash in amounts to not trigger a gift tax. (I would have no proof that this is not a gift, so am treating it as a gift.)


Some backstory to answer some other questions . . .

I have been depositing money gifted to my daughter since birth. It is truly her money, so it's not really a gift. The amount is more than the gift limit, but will be providing her the money in increments less than the gift limit to avoid any improper appearance.
I think you're missing the major point many have made here.

If the cash was hers to begin with then the present shares are hers as well. There is no gift involved since you don't own the shares. It's like the shoes she's kept at your house. If you drop them off at her dorm room they aren't a gift, you're just giving her back what is already hers. There is no gift tax involved in this transaction because you're "giving" her back what she already owns.

Silk McCue
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Re: Transferring Daughter's Funds to Her Efficiently

Post by Silk McCue » Thu Nov 07, 2019 10:15 pm

GUtiger wrote:
Thu Nov 07, 2019 10:04 pm

I think you're missing the major point many have made here.

If the cash was hers to begin with then the present shares are hers as well. There is no gift involved since you don't own the shares. It's like the shoes she's kept at your house. If you drop them off at her dorm room they aren't a gift, you're just giving her back what is already hers. There is no gift tax involved in this transaction because you're "giving" her back what she already owns.
You appear to have not carefully read the original post which states:
We have been saving her money in our taxable account at Vanguard in a LifeStrategy fund.
The parents legally own the shares. Period.

Cheers

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Re: Transferring Daughter's Funds to Her Efficiently

Post by inbox788 » Fri Nov 08, 2019 5:14 am

R2 wrote:
Wed Nov 06, 2019 7:54 pm
My wife and I have been saving money gifted to our daughter since early childhood. We have been saving her money in our taxable account at Vanguard in a LifeStrategy fund.

Now that she is 20, we would like to start transferring those funds to her. She is a student and has low income, and is not receiving financial aid.

Can we simply gift her shares of the fund directly? What are the tax implications?

We could choose to give her the cash value of the shares, but would then "own" those shares at our higher tax basis.

Any suggestions?
You should have used a UTMA, but that's too late for you now. There's what you say and how it looks on paper, and I'd tend to believe the latter.

Ignore that this thread is about UTMA accounts, pay attention to the Kiddie Tax discussion.
viewtopic.php?f=2&t=229903&p=4803369#p4803369

A couple can gift 30k (15k each) without any filing, so if you transfer less than that amount, you're safe. You can also transfer less than that and pay the taxes due as a gift depending on how much gains you realize, so they add up to less than $30k. (And I don't see a problem doing it over 2 years if it's more.) Taxes could be zero and it should be low if you don't realize much in gains. If she doesn't get a high paying job when she's 24, she can probably realize the remaining gains at zero or low capital gains tax rate.

How low is the income now? How much does she want to spend the next 3-4 years? Depending on how much capital gains, she can convert a little each year to minimize taxes. When was the last contribution? You might want to make sure the sales get long term treatment, so wait a year after last sale.

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R2
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Re: Transferring Daughter's Funds to Her Efficiently

Post by R2 » Sun Nov 10, 2019 10:28 am

Thanks for all the helpful information. I reflected on this for a bit before responding and thought maybe I would explain a little more backstory and the rationale, as I may have had some earlier flawed thinking.

The daughter of this post is my third daughter, and I put the money in our taxable account as she was receiving gifts from grandparents, us, as well as has been saving money in this account from jobs throughout high school.

Our intent was to provide the opportunity for her to have greater return than investing in a savings account. We started a UTMA for our fist daughter, but had some uncertainty about college financing and its impact on college financial aid, so did not create a UTMA for daughter 3.

For some reason, I have the desire to give her the money now, which might not be the best path forward.

I will talk to her and ask her when and how she would like to receive the money. It might make sense to make gifts in installments over a few years when she has some, but lower income than me and give her a little more to pay the taxes.

I have not thought through the specifics in the tax bill, which should dictate how we distribute the funds. There are capital gains to be distributed, as well as in this fund I have been getting dividends, which I have been paying yearly.

Any thing else to consider?

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