Tax Laws for Gifting Stocks

Re: Tax Laws for Gifting Stocks

• hoffse member

  

  February 2015

  I think you're talking about two different things here.  A 529 is for eligible education expenses only... unless you want to pay a tax penalty.  Holding and then gifting stock directly is something different.

  
  

  If you open the 529, then you are the owner of the account and your nieces/nephews are the beneficiaries.  It's kind of like a blend between a Roth account and a trust.  You ought to have full control over the account without the need to ever directly gift them anything (though I suppose you could transfer ownership of the account to them at some future date if you wanted).  As long as the funds are withdrawn for eligible education expenses of the beneficiary, then the funds can grow tax-free while they are held in the account. 

  
  

  Gifting stock isn't a big deal, but your nieces/nephews will pay taxes on it if/when the stocks are liquidated in the future.  These funds can be used for anything... but if you are pretty sure they are college-bound, then the 529 is a much better deal.

  
  

  I will say that I don't know if I would use one of the places you're talking about.  Maybe call an established investment bank like Fidelity or Schwab and see what they have to say about your various options?  They do this ALL the time.  Fidelity even has a credit card that sends rewards directly to your 529 of choice as a way to help pad the account.  Seriously, this kind of thing is their bread and butter, and they will be able to answer specific questions better than most of us can.
  

  
  

  Also, I suggest you don't use the internet as a way to research tax laws.  I have clients that do that and then they call me telling me that "the IRS says X" when in fact the opposite is true.  For questions about tax treatment for stocks and 529s, your best bet for (free) advice is an investment bank.

  
  

  **None of this is legal advice

  

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• noffgurl member

  

  February 2015

  I think I misspoke in my original post I know they are different. I was going to buy stocks for birthdays then 529's for Christmas but I switched that around because I was getting really confused about the stocks. I will have to go in somewhere and talk to them. I opened the 529's through the state they are living in. I chose the age based aggressive global option and honestly I have no idea if that was the best choice, it looked like it had the best interest rate.

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• Xstatic3333 member

  

  February 2015

  My grandfather gifted me stock after I was born using the Universal Gift to Minors Act (UGMA).  I have no clue how he did it but my mom was designated as the trustee.  We could have transferred the stock fully into my name at either 18 or 21, I forget which, but we were lazy and I trust my mom 100% so we just did it recently.

  
  

  He gifted me an energy stock, which apparently tends to be on the stable side but doesn't bring great returns.  I just liquidated it this year and it grew from $2000ish to $6000ish over the course of 30 years.  It provided a nice buffer for us.  We were planning to use it to help with our house purchase, but didn't end up needing to.  We used a little to upgrade the boiler (a major capital improvement) and when we get the check for the rest it will be going in our e-fund.  I know I had mentioned earlier planning to use it to pay off my car, but we decided against that since selling my H's busted car ended up causing us to dip into our e-fund significantly.  I also considered putting some of it in my Roth IRA, and may still do this if we are surprised with a big tax refund that can restock our e-fund.  Anyway...

  
  

  It was a very nice gift and I am very grateful for it!  Whether that is a better gift than a 529 may depend on the family.  The way this worked for me is that my mom handled the bills and invoices until I was about 25.  I knew it was there but pretty much just forgot about it.  I was very irresponsible in my early 20s, so this is a good thing.  I will have to pay some tax on the gains, but not very much (I think) since they were mostly "long term" gains.  I am tax clueless about this stuff, but we're going to a CPA this year so he'll know what to do.  

  
  

  It's really sweet of you to want to do this for your nieces and nephews  I agree with @hoffse that talking to a professional about the details is probably the easiest way to go.  You may need the kids' SSNs so I'd start putting out feelers with their parents about that.  Hopefully they won't mind if it's for this reason!

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• hoffse member

  

  February 2015

  noffgurl said:

  I think I misspoke in my original post I know they are different. I was going to buy stocks for birthdays then 529's for Christmas but I switched that around because I was getting really confused about the stocks. I will have to go in somewhere and talk to them. I opened the 529's through the state they are living in. I chose the age based aggressive global option and honestly I have no idea if that was the best choice, it looked like it had the best interest rate.

  OK I understand better now.

  
  

  Personally, I'm a fan of 529's.  They're a fantastic deal as long as a child is college-bound.  If you're not sure about that, then they can wind up being less of a great deal... or you can simply transfer them to a beneficiary (even yourself) who is college-bound or who could use it for qualified education expenses.

  
  

  Today the tax treatment for stocks held more than a year (long-term) is highly favorable compared to ordinary income.  It has been this way for a couple decades now, and it's one reason why business has generally done pretty well. However, it hasn't always been like that, and it could change in the future.  

  
  

  I personally think that capital gains rates have a higher likelihood of changing than the tax benefits of a 529 account.  Obama proposed changing the tax treatment of 529's recently, and he got such a backlash from it (from both sides) that he dropped it quickly.  I think that means they are probably here to stay.  I have a feeling the same thing would happen if a president proposed changing the tax treatment of Roth accounts.  Too many people rely on them for retirement at this point for them to go away.  It would be political suicide.

  
  

  Anyway, that's why I prefer funding Roths and 529's before just buying stock.  It's true that these kinds of accounts have restrictions on them, but if those restrictions work for you then they're a much better deal than the alternative, and I think you are making a fairly safe gamble that the rules aren't going to change before you (or the beneficiary) needs to dip into them.  I would max both of these options out before buying stock - or in the case of the 529, I would contribute at least up to the cost of state school before moving to other types of accounts.  Keep in mind that money is fungible.  If your nieces/nephew buy a car and start college the same year, it doesn't really matter whether you have provided them $10,000 toward that in the form of stock that can be liquidated for anything or a 529 that can be used only for education.  College+car will cost the same to them regardless.  You might as well save them the taxes on the stock by funneling that money into the 529.  Your gift will go farther that way.

  
  

  It only works if you're pretty sure they will go to college though. 

  

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