Q: We have three sons and have gifted to them in the past. They are married and one couple has four children, another has two and a third son just got married and as of today has no children. In the past we’ve gifted cash but with the rise in the stock market last year and the tax changes this year we are considering gifting appreciated stock. We haven’t always been in a high tax bracket but are doing pretty well now and anticipate being in the highest bracket for 2014. It is our understanding that upon the sale of any appreciated stock, we will be taxed at the 20 percent capital gains rate with an additional 3.8 percent net investment income surtax. We’ve never gifted stock before so could you explain the logistics of doing so and also what I need to tell my sons about any tax implications for them. This is not a real concern but what if they should divorce, does our gift get split or remain with our sons?
A.Sounds like a good plan to me. If you will be in the highest tax bracket in 2014 (39.6 percent) your long-term capital gains tax rate will be 20 percent and you may also be subject to the 3.8 percent net investment income surtax. Long-term gains are different than short term gains, the asset must have been held for over 12 months to qualify for long-term gain tax treatment. Those gifted an asset with gains will assume both the holding period and the cost basis of the owner gifting the assets. If the asset is held for less than 12 months before sold, any gains will be taxed at ordinary income tax rates.
The tax impact on your sons will depend on their income tax bracket. Long-term capital gains tax rates for those not in the highest income tax bracket are as follows: 0 percent for those filers in the 10 percent or 15 percent marginal income tax brackets and 15 percent for those in the 25 percent, 28 percent, 33 percent or 35 percent marginal income tax brackets. For those married filing jointly with taxable income of $73,800 or less, the capital gains rate will be usually be zero because they will be in the 10 percent or 15 percent tax bracket. Those filing jointly with taxable income from $73,800 up to $405,100 would pay a 15 percent capital gain tax. As with all tax issues, determining the tax rates are a bit more complex. The standard deduction for 2014 is $12,400 and the personal exemption is $3,950. With standard deductions and exemptions, your married son with four children could have taxable income of $36,100 over $73,800 and remain in the 15 percent bracket, the couple with two children, $28,200 over that amount and the newlyweds (if they don’t have children this year) $20,300 over $73,800. You also need to determine how the long-term capital gain amounts will impact your son’s income tax brackets. Long-term capital gains won’t push them into a higher tax bracket because the gains are taxed at special rates but it may cause them to pay tax on the gain. The 0 percent rate only applies to the amount of long-term capital gain needed to bring them up to the 15 percent tax bracket. For example: Their ordinary taxable income is $5,000 below the amount to put them in the 25 percent marginal tax bracket but the sale of the securities gives them a $10,000 capital gain, they will pay 0 percent on $5,000 of the gain and 15 percent on the other $5,000.
Logistics: Each son will have to have a brokerage account. You will need to know the DTC number, account title, brokerage name and account number. You will then complete a DTC transfer form from your brokerage account indicating the number of shares and your son’s account information and submit this to your brokerage. A gift from you is considered nonmarital property in “the unlikely but possible” event of divorce. If a gift is placed in a joint brokerage account and a divorce occurs, the gift can still be traced but it is more difficult to prove that it is a nonmarital asset once it is in a joint account. Nonmarital assets, in most states, are considered separate property and not subject to a property division in divorce. If you are worried about the possibility of divorce and/or this is a very large gift, you may want to encourage your sons to open an individual brokerage account. If their state acknowledges a transfer on death designation (North Carolina does) they can complete a transfer on death form which will allow the account to transfer outside of probate, to the named beneficiary upon their death, which of course could be their wife.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624