Dear Linda,

I want to gift some of the concentrated stock in my brokerage account to my adult child. 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?

Here are a couple of options:

Option 1 - Gift the Asset

If your son receives the stock as a gift then he will also receive your cost basis (purchase price plus other costs like commissions and fees). Therefore, when he goes to sell the position, he will pay tax on the large gain.

This will 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 inherits the stock upon your passing, he will receive a step-up in cost basis. That means the cost basis of the asset will 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 immediately with minimal, if any, taxes due and invest the proceeds in a diversified portfolio.

Conduct a thorough analysis of options 1 & 2 with your financial and tax advisor to confirm which strategy makes the most sense given your and your son's ages, health situation, tax rates, stock value, and 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 ($17K for individuals in 2023) and an estate tax exemption ($12.92M for individuals in 2023).

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 donating cash. The potential charitable deduction equals the fair market value of the stock and an IRS-qualified charity can sell the asset without having to pay tax on the gain. It may also be advantageous to utilize a Donor Advised Fund (DAF).

3) Harvest losses elsewhere in your portfolio to offset the capital gains realized when selling some of the highly appreciated stock.

originally published 3/21/2018

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.