February 03, 2019
Every week, Simply Money’s Nathan Bachrach and Amy Wagner answer your financial questions. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to firstname.lastname@example.org
Carl and Cindy from Cleves: From a tax standpoint, should we give our stock shares to our adult son now or just let him wait to eventually inherit the shares?
Answer: This really depends on how much stock you’re talking about, if the stock has seen significant gains, and if your son needs the money now (or not).
If you’re thinking of giving your son a substantial amount of stock that’s grown in value over the years, in most cases, it makes more sense for him to inherit the shares once you’re gone. This is due to something called a “stepped-up” tax basis.
Here’s what that means: when you buy stock at a certain price, that price is your cost basis. You then use this number to determine any losses or gains. For example, if you bought a stock for $100 and you sell when it’s worth $250, you have $150 worth of capital gains.
Now let’s say you plan to let your son inherit that same stock, and on the day the last one of you passes, it’s worth $500. Your son would inherit the stock with a cost basis of $500, not your original $100. Conversely, if you were to simply “gift” the stock to your son now (while you’re both still alive), his cost basis is your original $100. As you can see, if the stock you’re dealing with has big profits, you’ll save your son money on taxes (once he sells) if you wait to let him just inherit the stock. Of course, if he needs the money now, that rationale may be moot.
If you’re not dealing with a lot of stock shares and/or a lot of profit, gifting the stock to your son now can make sense. The annual gift limit is $15,000 per person ($30,000 per couple). Any gift you give at or below this limit does not need to be reported to the IRS (note: there are lifetime limits). But, just remember, in this scenario his cost basis when he eventually sells the stock is your original cost basis.
Here’s The Simply Money Point: There are some tricky tax rules to navigate when dealing with passing along stock, so be sure to consult a trusted tax professional and/or financial advisor.
T.M. in Finneytown: My wife’s employer just laid her off after more than 30 years of service. I’m 61 and on disability (car accident). We’ve saved almost $200,000 and my wife will still get a pension but we both planned to work another 5 or so years, so this has left us both in shock. Any recommendations for what to do right now?
Answer: We’re really sorry to hear about your situation. And while we know this won’t make you feel better, 60 percent of retired workers told Voya Financial they had to stop working unexpectedly – so you’re not alone.
First off, make sure your wife not only gets any severance package to which she’s entitled, but she should try to negotiate to improve the terms of her package. This includes maximizing her severance amount; getting paid for all of her unused time off; company stock; and, the big one, extending her health insurance coverage.
As for your wife’s pension, be sure you both understand the benefit options (lump sum, survivor benefit, etc.) and its funding status.
The two of you should also look at your budget. Now’s the time to cut your spending, consolidate debt, and to make sure you’re not borrowing any additional money on your house or credit cards. This could even potentially mean refinancing to extend your mortgage to lower your monthly payment. Remember, money not going out is the same as money coming in.
The Simply Money Point is that every step of a “forced” retirement requires careful planning because there’s so little room for error. We recommend getting unbiased advice from a fiduciary financial advisor and getting a comprehensive financial plan.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and his team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email email@example.com.