Insider Jeff Fleming

Share the Wealth

You've worked all your life to amass your retirement savings. And you'd like to share the wealth with the rest of your family, too! This week, Jeff helps you straighten out the best ways to cut taxes on financial gifts.

Dear Jeff:
When my stock split a few months ago I transferred those stocks to my children. My question is, what is the cost basis of these stocks when they sell it? Is it what I paid for it or what the price was at the time of transfer?

Jeff Says:
If only it were true. If only we were able to establish a new higher basis in our investments when we gifted them to our children. Much to my dismay, and probably yours too, it is only wishful thinking.

When your children receive the stocks from you, they also receive your basis. The effect of this basis transfer is that they will realize the same amount of gain if they sell the stock as you would have realized if you kept the stock and sold it yourself.

Gifting stock or other property to your children has its advantages. The gifted property is removed from the donor's estate and can be enjoyed by its recipients. Unfortunately, if the primary motivation is to reduce or eliminate the capital gains tax that you will incur upon the sale of the property, then you could consider alternatives--including gifting to a charitable trust--about which I talk in more detail in a previous article.

There is one time when property can be left to our children and they will receive a stepped up basis, but it is not one particularly favorable to the donor. At death, property is received by our beneficiaries with a new basis, which is determined on the date of our death. Alternatively, therefore, it might make sense to retain the highly appreciated property until death and gift cash or other non-appreciated assets to your children.