Wealth Management Question
 

My father has a regular (non-Roth, non-IRA, etc) investment account with a combination of equities and cash. It's got about $56K total in it, roughly half equities and half cash. He says he hasn't touched it in about 20 years. He would like to pass on the wealth to his grandchildren. Given that there are equities involved, how can he do so in the most tax-advantaged manner?

His overall desire is to divide the $56K evenly between the 5 grandkids and gift them each lump sums of about $11K. That won't invoke any gift taxation from the IRS. (Would be different if he tried dividing the $56K by two, and gifting half to my sister and half to me.) But if he sells the equities, there will be long-term capital gains to be paid. He's trying to avoid that. He's fine with a straight gift, or via a 529, or however he can pass on the wealth to the next generation(s) with minimal tax exposure to all parties involved.

It's the equities (maybe $30K worth?) that I can't figure out. What he's held has been held for so long, looking at a monthly statement, I cannot figure out the cost basis (that line is blank). How do you figure out long term capital gains when you have no idea what the original cost basis was?

One of you guys has to have a clever way around this issue.

We have gifted shares of stock in my family. I was not the giver, so I can't say what was involved.

Stocks can be gifted to children through a custodial account, easy peasy.

As I understood it, if you gift the stock while alive, then the basis is passed on as well. If passed on as an inheritance, then the basis for the recipient will be the value at the time of the death of the giver.

I’d look into opening a 529 education savings plan for each grandchild owned by the parent(s) of each child.

Stocks are good to inherit because generally the recipient accepts it at the stepped up cost basis, not the original cost basis of the giver. Generally could be done through your broker, or through a trust.

Anyone know what happens to the basis if he establishes a revocable trust?

I know some rich people who have Pillsbury stock from 1935, stuff like that, they always give it away with their charitable contributions at the end of the year so that they can avoid the capital gains tax, which would be massive.

Not sure if that applies to gifting it to heirs. Another idea is the give it away while still alive to avoid the whole estate situation. Obviously, consult someone with a lot more expertise than me. :)

List them as beneficiaries on the account. When he passes they'll receive a step up cost basis and it will go to them tax free if I'm not mistaken.

This is the correct answer. No need to make it any more complicated than this. Each GC will inherit 1/5 of the account and can cash out their share with zero tax consequences due to the stepped up basis at date of death and the post-tax nature of the funds in the account.

He can gift $18,000 per year to a single person.

But if he pulls it from the investment he'll have to pay tax on the gains.

The lifetime exemption limit for Federal Estate and Gift Tax is presently $14M. So keeping gifts under his annual exclusion amount is probably not necessary. SmileWavy

If he gifts the stock to his grandchildren, they'll have to sell the stock to use the funds for things like 529 plans/college. I don't think you can invest in individual stocks in a 529 plan. Then there will be capital gains to pay (which we're trying to avoid). Especially if there is no step up cost basis.

Then again, maybe there is a step up cost basis....

My parents were both joint account owners. Or, rather, I think their living revocable trust was the account owner (and they were the two trustees). My mother recently passed away (which is why my Dad has been looking into all these accounts). California is a community property state, so when there is the death of one partner, property can be re-assessed in value. At least property like houses can be, which has huge implications in capital gains. So perhaps the stock would be re-assessed at the time of my mother's passing (?), in which case the capital gains would be minimal.

If your thinking of the future and really want to leave a legacy, start a trust and let it grow for grandkids only. Let the properly planned trust plan for the taxes down the road.
Trust me, it will make the family stay in touch with each other forever or alienate them forever. ;)

They all already have 529 plans. But again, I don't think individual stocks can be held in a 529 plan. It's the individual stock holdings that has me partially stumped. The 529s I've seen have always only allowed you to pick from a portfolio of mutual funds.

Threadjack: In retrospect, I should have opened 529 plans for my sister's children, and my sister should have opened 529 plans for my children. Then, when filling out financial aid forms (maybe not the FAFSA, but at definitely for the CSS profile), we could answer that we held no 529 savings for our children (because technically the 529 is assigned to the person opening the plan--usually a parent--and not the child). On one hand regarding financial aid, I understand the desire to help those who don't have a lot. But it also shouldn't be held against me if I saved for my children's college education over the years, and another family went on nice summer vacations instead.

You guys have the simplest answer. That is certainly the best, least complicated idea. But ... if the grandkids (or their parents) want to use the money for college education/529 savings and my dad lives for another 15 years, that doesn't work out there.

I appreciate all the advice.

I believe he can make contributions from a brokerage account to a 529 but I'm not sure what the tax implications would be. As you mention, the difficulty is the stocks. 529's only take cash contributions so it would seem he'd have to cash out of the stock. Where's barettafan when we need him??

This. Again.
It’s not much $ and there are no RMDs like there would be with an IRA. This is by far the cheapest and easiest option.

Yup, step up but what fun would that be. I wouldn’t sweat the 18k (think that’s it) rule.