Dear Linda, I am a widow and want to gift some of the individual, concentrated stock in my brokerage account to my only child, my adult son. I am tired of managing the stock and feeling like I need to stay on top of the earnings reports, news, etc. I would rather gift it to him and have the rest of my portfolio in low-cost, diversified positions. The stock has a very low basis and will incur a large amount of long-term capital gains upon selling. What are your thoughts? Sincerely, Generous Mom
Dear Generous Mom,
Here are a couple options:
Option 1 – Gift the asset: If your son were to receive the stock as a gift, he would also receive your cost basis (purchase price plus other costs like commissions and fees). Therefore, when he goes to sell it, he will also owe a large amount of capital gains. This would meet your objective of getting rid of the concentrated position, which you presumably don’t need to fund your spending needs, but it may not be the most tax-efficient strategy.
Option 2 – Bequeath the asset: If your son were to inherit the stock upon your passing, he would receive a step-up in basis. That means the cost basis of the asset would equal the fair market value at the date of your death. In other words, if he waits and inherits the stock, he can turn around and sell it upon your passing with minimal, if any, taxes due and invest the proceeds in a diversified portfolio.
Conduct a thorough analysis of option 1 & 2 with your financial and tax advisor to confirm which strategy makes the most sense given you and your son’s ages, health situation, tax rates, the stock value and the unrealized gain. You should also include an estate planning attorney in the discussion to see if there are any estate or gift tax issues. For example, there is an annual, per recipient gifting limit ($15K for individuals in 2018) and an estate tax exemption ($11.2M for individuals in 2018).
If you decide Option 2 is the best choice, speak with your financial planner about other ways to help reduce your concentration in the stock. Here are some examples:
1) Stop re-investing interest and dividends so you do not further the concentration issue.
2) Consider donating some of the highly appreciated stock instead of cash. The potential charitable deduction would be equal to the fair market value of the stock and an IRS qualified charity can sell the asset without having to pay tax on the gain.
3) Harvest losses elsewhere in your portfolio to offset the capital gains realized when selling some of the highly appreciated stock.
Have a question that relates to financial or tax planning? Ask Linda.