Transfer of stock to minor children, invest in 529.

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HAZEL
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Joined: Tue Dec 18, 2007 11:58 am

Transfer of stock to minor children, invest in 529.

Post by HAZEL » Sat Oct 22, 2011 11:42 pm

We have owned a particular stock for a long time. There would be significant capital gains if we sell. We are considering giving part of the shares, each year, to our two teen age children. They would then sell the shares. The proceeds would be invested in a 529 plan. Skip any concern about the kids running off with the money. The information we are looking for is: 1. Would this avoid capital gains tax altogether, since the kids have no other income? 2. Is this legal?

Bob's not my name
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Re: Transfer of stock to minor children, invest in 529.

Post by Bob's not my name » Sun Oct 23, 2011 3:45 am

Yes, it's a great idea. I've done it. You and your spouse can each gift up to $13,000 of stock to each child each year without filing a gift tax return, so you can move $52,000 of stock to two kids in a single year. You can set up UTMA/UGMA accounts at the same brokerage to do this easily. This tax mitigation strategy is especially attractive if your federal marginal rate on capital gains is even higher than 15% due to AGI-based phaseouts such as the child tax credit or one of the education credits.

You have to understand the kiddie tax, so read up on that. Basically, they can each realize up to $1,900/year of gains and pay no federal tax (so if you start now they can realize $1,900 of gains in 2011 and shortly thereafter realize $1,900 more in 2012). That doesn't mean you have to gift in increments (except as necessary to stay under the gift limit), just that they should sell in increments. The cash can be reinvested in something suitable for their college costs, or you can withdraw it from the trusts to pay for their current expenses (computers, sports, music, etc.). I found Fairmark's article on this pretty useful: http://www.fairmark.com/custacct/spend.htm

As for whether it's worthwhile to move UTMA funds into a 529, that depends upon your timeline, financial aid prospects, and state tax code. My state allows a tax deduction for contributing to a 529 but only my state's 529. It has higher expenses than I can get with a straight UTMA account at Vanguard, and when I did the math on the choice I found the savings would be so small it wasn't worth the hassle (and financial aid is not a consideration). Your situation may be entirely different.

Final note: you can avoid federal capital gains tax and AGI-based phaseout de facto taxes this way, but your state tax treatment may be different (but in any case shouldn't be worse than the parents realizing the gains).

HAZEL
Posts: 37
Joined: Tue Dec 18, 2007 11:58 am

Re: Transfer of stock to minor children, invest in 529.

Post by HAZEL » Sun Oct 23, 2011 6:05 am

Thanks for the great response. I love Bogleheads. This will be really helpful.

letsgobobby
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Re: Transfer of stock to minor children, invest in 529.

Post by letsgobobby » Sun Oct 23, 2011 8:49 am

fools say otherwise, though I would hardly consider this the final word. Also, it's an outdated article and perhaps new rules are in effect now:

http://www.fool.com/taxes/2002/taxes020531.htm

Gifts of appreciated property
At the time of the gift, if the fair market value of the stock is more than the donor's original cost basis, then the recipient's basis is the same as the donor's basis. If the donor was required to pay gift tax, the recipient's basis is increased by the amount of gift tax paid that is attributable to that gift.

Example: Dad buys 100 shares of ABC stock for $5 per share and gives it to you as a gift several years later. On the date of the gift, the stock is valued at $15 per share. You sell it a few days later for $15 per share. Your capital gains are long-term, even though you only held the stock for a few days. This is because, when you are given a stock gift, not only do you keep the donor's basis, but you also keep the donor's holding period. So, you'd report this transaction on Schedule D using Dad's original purchase date, the sale date when you sold the stock (a few days after the gift), and recognizing a long-term gain of $1,000.

Using a gift to save taxes: You bought 500 shares of XYZ for $20 per share several years ago. The stock is now worth $30 per share. You want to help Mom out with a financial need, so you give her 300 of the shares.

You have gifted stock worth $9,000 (300 times $30), so you're safely below the $11,000 annual gift tax exclusion limit (more on gift tax limits later). The basis of the shares in Mom's hands is $20 per share, your initial cost basis. If she turns around and sells the stock for $30, she will have a gain of $3,000 (300 times $10) that will be taxable to her.

Bob's not my name
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Re: Transfer of stock to minor children, invest in 529.

Post by Bob's not my name » Sun Oct 23, 2011 9:00 am

Right, I think the OP is clear that the basis carries through to the gift recipient. In this case the recipient is a minor without earned income who will pay zero federal tax on the first $1,900 of gains. So with two kids there's the opportunity to realize $3,800 of tax-free gains per year, or $7,600 in the next three months. I saved thousands of dollars doing this, since I was in the AOC phaseout, MWP phaseout, Roth IRA eligibility phaseout, and spousal TIRA eligibility phaseout, and I live in a high tax state.

letsgobobby
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Re: Transfer of stock to minor children, invest in 529.

Post by letsgobobby » Sun Oct 23, 2011 9:16 am

oh, I see. Got it.

How do you regain control of the money? Or is this a one-way gift only?

Bob's not my name
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Re: Transfer of stock to minor children, invest in 529.

Post by Bob's not my name » Sun Oct 23, 2011 9:23 am

The OP's intent is college savings. In my case I was gifting to kids already in college, so I didn't even need to use a UTMA (because they were over 18), and the untaxed gains were immediately deployed against tuition. See the Fairmark link in my post regarding how much liberty you have to employ the funds for any of your child's expenses. I don't think any parent would have a hard time identifying $1,900 of expenses per year to which to apply the untaxed gains.

letsgobobby
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Re: Transfer of stock to minor children, invest in 529.

Post by letsgobobby » Sun Oct 23, 2011 10:32 am

but in order to have $1900 of gains, one might need $10,000 or $20,000 of gift. It is not as easy to think of how to spend that, but obviously it is doable.

So in summary:

Have $10,000 value holding, with $8100 in basis and $1900 in gains.

Gift to kids (does this step need to be in UTMA?).

Immediately deposit into kids 529s.

No tax owed at any step.

?

Bob's not my name
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Re: Transfer of stock to minor children, invest in 529.

Post by Bob's not my name » Sun Oct 23, 2011 10:45 am

letsgobobby wrote:but in order to have $1900 of gains, one might need $10,000 or $20,000 of gift. It is not as easy to think of how to spend that, but obviously it is doable.
Yes, you're right. Obviously gifting highly appreciated assets is better if you want to spend the money now, unless, as in my case, there is $60,000 of college to pay for each kid, in which case it's not an issue.
letsgobobby wrote:Have $10,000 value holding, with $8100 in basis and $1900 in gains.

Gift to kids (does this step need to be in UTMA?).

Immediately deposit into kids 529s.

No tax owed at any step.

?
I don't actually know if a UTMA is necessary. I thought it was for minors to hold assets. Also, you skipped the "Kids sell stocks" step before moving the money into 529s (if that is even desirable), and since you matched $1,900 to "kids", I'll reiterate that it's $1,900 per kid per year, so someone acting on this now could give $7,600 of unrealized gains to two kids and have the kids realize all the gains before three months is out. Finally, "no tax owed" depends on your state tax. There will be no federal tax owed if this is the kids' only income.

letsgobobby
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Re: Transfer of stock to minor children, invest in 529.

Post by letsgobobby » Sun Oct 23, 2011 10:55 am

Add this to the long list of things I have learned on Bogleheads! Between TLH'ing, donating appreciated securities to charity, and now giving appreciated securities to my kids for funding of a 529 I would already do anyways, I many never sell an appreciated security for taxes again!

thanks Not Bob.

HAZEL
Posts: 37
Joined: Tue Dec 18, 2007 11:58 am

Re: Transfer of stock to minor children, invest in 529.

Post by HAZEL » Sun Oct 23, 2011 9:04 pm

Thanks again everyone. The additional discussion was helpful.

Bacchus01
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Re: Transfer of stock to minor children, invest in 529.

Post by Bacchus01 » Mon Apr 16, 2018 3:29 pm

Does anyone have a current link or similar for the Fairnark article?

I’m trying to figure out what I can have my kids pay for to support gifting them appreciated shares and reducing cap gains.

My assumption is I can reinvest my money that I would have paid, like $2K for soccer fees, and reset my basis.

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