Gift giving comes hand in hand with the holiday season, and finding the appropriate thoughtful gift for every party can often be challenging. In 1994, Blockbuster entertainment became the first company to introduce an idea to overcome this anxiety on a widespread scale. This idea has created an explosive growing industry in itself: Gift cards. You give someone the movie experience, but they get to make the final choice of which one to watch. Although you might be hard-pressed to find a Blockbuster video in 2020, billions of dollars are exchanged via gift cards and that idea doesn’t seem to be going away any time soon.
Some have considered this a great boon to gift giving, providing a more fulfilling gift exchange with less anxiety and more closely aligned desire fulfillment. Others have suggested that it takes the heart out of gift giving, and is too similar to giving cash without the benefit of the full freedom that cash provides.
Investors providing substantial gifts to children or grandchildren may feel similarly about stocks as gifts, especially if the recipient isn’t familiar with investing. Wouldn’t it be less constraining to give cash and then they can choose to invest if they wish, and to keep managing the investments until they are passed on as part of the estate?
The answer of what’s most appropriate may change based on the family makeup, however there are some unique benefits to giving stock instead of cash, and important benefits to giving during life instead of as part of an estate. Here are some of our favorites:
Giving while living – Taking advantage of the annual gift tax exclusion.
One tax benefit to take advantage of in estate planning is called the annual gift tax exclusion.
This annual exclusion makes it so someone can give as many recipients as they’d like $15,000 each year without incurring federal gift tax liability. This may not seem like a lot when looking at a sizable estate, but over several recipients and a substantial amount of time, annual exclusion gifts can really add up. For married couples, each partner can make a $15,000 gift, so that could mean $30,000 in a year to one recipient.
Here’s an example (we’ll assume the current tax rate, but that may change in the next ten years):
Two grandparents want to support all their progeny. They start by providing the maximum gift tax annual exclusion amount to their four children and 12 grandchildren in 2020 and subsequent years, and add in 4 additional great grandchildren in 2025 until 2030. That’s $480 thousand each year given for five years, and $600 thousand for the second five years. Total gifts of $5.4 million may be made with no gift tax exposure over the ten-year period. The example becomes substantial because there are so many recipients that they are supporting, and because they diligently made the gift every year. There is still time to make those gifts for 2020.
Should the estate still be large enough that the 40% estate tax rate is incurred, the $5.4 million taken out of the taxable estate avoided $2.16 million in federal estate taxes for the wealth transfer.
Should the grandparents sell appreciated stocks or other assets to fund such generosity?
In doing so, they will incur federal and state taxes on their capital gains, which could be quite substantial. The alternative is to make a gift of the appreciated assets, such as $15,000 worth of shares of stock. Those receiving such shares will take the tax basis of the grandparents, and so they in turn will be exposed to a capital gain tax when they sell. However, the children or grandchildren may be in a lower bracket than the grandparents—as low as 0%!
Additional benefits of giving stock: stock history, and your experience!
Starting to invest in the stock market can be a daunting experience. By gifting stock that’s been held for many years instead of cash, the history of that stock purchase can also be provided. A younger investor may be able to more easily relate to how much appreciation can happen over time, and become more comfortable with the idea of starting to build his or her own portfolio.
It may not be possible to pass on all the lessons learned over a lifetime of investing to progeny. However, the gifts of stocks over time don’t just come with the story of the company, they come with the potential of sharing your investment story. When receiving stocks as part of an estate, the recipients don’t have the opportunity to ask questions such as:
What made you decide to invest in this company? Was it the CEO, and experience you saw with his leadership elsewhere? Was it the price-to-earning ratio or other metrics that drove your decision? Perhaps you loved the product provided? Did you recognize something in the industry? Are you a value-investor that prefers dividend-paying stocks, or a growth investor who tries to spot where the next big potential shift is coming from? How much of your income were you setting aside for saving, or investing?
This experience and knowledge gained could become more valuable to the recipients than the cash value of the stocks themselves!
By providing a gift card for someone rather than cash, you are creating a designated usage and focus for the funds, but still leaving some final choices in the hands of the receiver. There can be added benefits to that designated usage, and when giving stocks instead of cash there may be some tax benefits as well.
When considering larger gifts and estate planning, it may be wise to check out the utility of a trust. Take the next step to contact an Arvest Trust Officer.
Arvest Wealth Management does not offer tax or legal advice – consult a professional. This content has been provided by Merrill Anderson and is intended to serve as a general guideline.
© 2020 M.A. Co. All rights reserved.