We work with folks in or near retirement, which is typically the sweet spot for a strategy like this. We also work with people who tend to be pretty comfortable financially, where they can say with a level of confidence that they will be okay. That allows the flexibility to think about how they can help their kids. When you give stock to a child, it’s considered a completed gift, which means you’re not getting that money back. As mentioned above, you should double-check your financial plan to make sure you’re going to be financially secure before considering this. If you don’t have a plan or want to double-check the one you have, you can schedule a time to chat below.
The idea here is simple. Want to give your kids money for a downpayment? Want to help cover daycare expenses? Instead of writing a check, transfer stock into their account. When you transfer stock, there is a carryover in basis. That means if you bought XYZ stock for $50 and now it’s worth $250, there is still a $200 unrealized gain that will be realized when they sell it. Then, why do it? This works in a situation of tax arbitrage. In English, this works if their capital gains rate is lower than yours.
There are several income tax brackets, and most people have a general sense of their progressive nature. Most folks I talk to don’t realize that the same sort of thing exists on the capital gains side. While many people fall into the 15% capital gains bracket, you may pay 0%, 15%, or 20% on long-term capital gains, and higher-income taxpayers may also owe the 3.8% net investment income tax, depending on their income and individual tax circumstances. Many states also apply their income tax rate to capital gains. In an ideal scenario, you are giving to kids who are in school or at the beginning of their careers and thus have capital gains rates of zero. However, it’s still a win if their rate sits anywhere below yours.
Here are the capital gains brackets without the net investment income tax, which is what adds that 3.8% for the top two brackets:
| For Unmarried Individuals, Taxable Income Over | For Married Individuals Filing Joint Returns, Taxable Income Over | For Heads of Households, Taxable Income Over | |
| 0% | $0.00 | $0.00 | $0.00 |
| 15% | $49,450.00 | $98,900.00 | $66,200.00 |
| 20% | $545,500.00 | $613,700.00 | $579,600.00 |
It’s important to point out that these thresholds are based on taxable income, which is gross income less deductions. So, if your unmarried daughter is making $75,000 there still may be an opportunity here.
If you’re sitting there nodding your head, raising your hand, or both, press pause. I often caution clients that giving money can be a rope or it can be quicksand. Most of this depends on the child, and you probably know which it is. However, it also depends on what the gift is for. I am a fan of helping with one-time expenses or expenses on a finite timetable. That’s why I mentioned downpayments and daycare. I am not a fan of gifts without an intended goal. Those tend to disappear or reappear in the form of something that gets parked in a garage.
This article is provided for informational and educational purposes only and should not be construed as investment, tax, or legal advice, or as a recommendation regarding any particular strategy. Whether a Roth conversion is appropriate depends on an individual’s financial circumstances, tax situation, investment objectives, and applicable law. Tax laws are subject to change and their application may vary. Examples discussed are hypothetical and are intended solely to illustrate general planning concepts. They do not reflect the experience of any specific client or guarantee future results. Consult your financial, tax, and legal advisors before implementing any strategy.