How best to transfer stocks?

December 19, 2007 12:10 PM

My in-laws would like to give my daughter 15 shares of stock (about $1500) to help with her college expenses. What is the best way to do this considering financial aid and taxes for both my in-laws and my daughter?

This is not a huge amount of money, about $1500 at todays price. But we want to make sure that we do not create any unintended tax liabilities or issues with my daughter's financial aid package at school. She will be studying overseas next fall and the money will help with her expenses.

So do my in-laws go to a broker to transfer the stock to my daughter who then cashes it out in a couple of months? Do they cash the stock out themselves and give her the cash? What are the implications of each?

posted by retrorider to work & money (4 comments total)

IANAFinancial Advisor, however, paying fees to place money in a stock for a couple of months and then paying fees to sell such stocks and facing capital gains taxes (on the assumption that the stocks go up during this market downturn) seems far less logical than giving someone $1500 in cash and having them place it in an interest bearing account or giving her $1500 worth of current rate purchased foreign currency that she can either use abroad or cash in at her return and make money on the falling dollar when she exchanges it back.
posted by Pollomacho at 12:19 PM on December 19, 2007

You don't have to worry about gift tax, which only starts for higher dollar amounts ($12,000 IIRC). You don't have to worry about the "kiddie tax" which only applied to kids under the age of 14.

You do have to worry about tax on the gain in value that the stock has realized. Your daughter would inherit the basis your in-laws have in the stock. If they paid $500 for the stock five years ago, she will owe tax on the difference in value between what they paid and what it is now worth. If they bought the stock more than one year ago, the income will be subject to long-term capital gains tax. If your daughter is in the 15% tax bracket, she will only owe 5% tax on the gain (plus she may have so little income as to owe no tax whatsoever). In general, transferring the shares is preferable because your daughter will generally be in a much lower tax bracket than your in-laws. If they sell it first, they will owe tax at their rates, which may eat up 10% of the value of the stock ($150 in this case).

The math is are the tax savings greater than the cost of transferring the stock. This would almost always be the case. If your daughter opens an account with the same broker as your inlaws, the transfer should be free. She'll pay a commission ($10-$20, probably), but the in-laws would have to pay that anyhow, so it is a wash.

Technically, a gift of cash and a gift of stock should have the same effect on her financial aid, but I guess they are more likely to detect a gift of stock than a gift of cash (she will probably have to file a tax return on the stock).

Motley Fool article on point
posted by Lame_username at 12:37 PM on December 19, 2007

For the actual transfer, just open a second brokerage account side by side with wherever the stock is being held now. The brokerage should switch the ownership over for free between the accounts.
posted by cschneid at 1:04 PM on December 19, 2007

Why not just sell them and give her the cash? It sounds like you guys are worried about possible capital gains tax, not gift tax. As others said, it's two low for gift taxes so you don't need to notify the IRS or anyone else.
posted by delmoi at 10:31 PM on December 19, 2007