Question: I am an 80 year-old widow and have some stocks I would like to either give to my daughter or sell. They are currently worth about $100,000. What tax, etc. will I need to pay? Is there a one-time capital gains release? I have never taken any type of tax credit and am wondering how I can prepare for this.
Answer: If you transfer the stocks to your daughter, you will have to file a gift tax return because the value of the stocks exceeds the annual gift exclusion of $14,000. Then if she sells the stocks she will have to pay tax on the difference between your cost basis in those stocks and the sales price.
If you sell the shares of stock, you will be liable for tax on any capital gain you realize from the sale. There is no capital gain exclusion on the sale of stock like there is on the sale of a personal residence. The capital gain is the difference between the net sales price and the cost basis. If you owned the stock for a long time you may not know your cost basis. If you purchased the stock yourself the cost basis is simply the amount you paid to buy the stock. If you purchased the stock together with your husband and held it as community property, then the cost basis would be the value of the stock on the day your husband died. If you received the stock as a gift, then the cost basis is the same for you as it was for the person who gave you the stock. If you inherited the stock, the cost basis is the value of the stock on the date of death of the decedent.
It can be very difficult to reconstruct cost basis on stock that someone has held for a long time. You’ll have to dig through old records. Perhaps you will find a receipt or confirmation for the purchase. Perhaps you sold some shares on some earlier date and reported the sale on your tax return, which would show the cost basis. If you don’t have any records, then try to determine when you acquired the stock and research the historical price of that stock. This can give you an estimate to use when you calculate the taxable capital gain. If a taxpayer can’t substantiate the cost of property that they sell, the IRS will assume that the cost basis is zero. That position, of course, is very unfavorable to the taxpayer and that is why you should do some serious research to determine the cost basis.
Why don’t you want to keep the shares of stock? If you don’t need the money for living expenses, you should consider keeping the stock and let your daughter inherit it. The big advantage to keeping it is the fact that the cost basis on inherited property is stepped up to the fair market value on the date of death. So if you bequest the stock to your daughter via your will, living trust, or Payable on Death (POD) (or Transfer on Death TOD) account, then after you die she can sell the stock and pay little or no tax.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.