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Giving Stock

INSTEAD OF GIVING cash, you could give away investments held in your taxable account that have appreciated in value. This can work well with charities, as we’ll explain later in this chapter. But with your children or other family members, it can be a mixed blessing.

Let’s say you give your children some shares you own. If you had paid $10 a share for the stock and it’s now worth $50, your children will assume your $10 cost basis. If they sell, they’ll owe taxes on the $40 per share in capital gains, assuming the stock is still worth $50. This isn’t great—but if their tax bracket is lower than yours, there will be some tax savings. Your children will also assume your date of purchase, which will affect whether the gain is taxed at the short-term or long-term capital gains rate.

What if the stock has fallen in value? If, when sold, the stock is still worth less than your cost basis but more than the value when gifted, there’s neither a gain nor a loss. In that situation, you would have been better off selling the stock first, taking advantage of the capital loss and then giving the proceeds to your children. If, however, the stock continues to fall in value, your children will be able to realize a capital loss, but only based on the difference between the value when gifted and the sale price.

If you hang onto the stock until you die, none of this matters. Your heirs inherit the stock at its current market value, thanks to the step-up in cost basis. At that point, any potential capital-gains tax bill disappears—but so, too, does the chance to use any unrealized capital loss.

Next: Wills

Previous: Smart Giving

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