How to Shift Appreciated Property to Relatives

Shifting appreciated assets to relatives can be a way to benefit adult children, parents or other relatives while saving money in taxes. With careful planning, this tactic can also avoid filing a gift tax return and exclude the assets from your estate. Congress has changed the tax laws to exclude minor children under age 19 and those up to age 24 who are full-time students and still dependents. Before the change, parents and grandparents could give children over age 13 appreciated assets for such practical purposes as paying college costs without triggering the “Kiddie Tax.” Here are the ways to shift appreciated assets to relatives under the existing tax laws.

Instructions

1. Understand the gift tax limits. A taxpayer (the donor) can give a gift (up to $12,000 under current law) in cash or assets to anyone (the donee) without reporting the gift or filing a gift tax return. A husband and wife can each give this amount each year to the same person (for a total of $24,000 under current law). If the donee is married, the same gifts can be made to the spouse as well. This means parents can give the maximum non-taxable gifts to their married children or their own parents (for a total of $48,000) each year. If the adult married children have children of their own, married taxpayers can also give the maximum gift to each child.

2. Take advantage of the capital gains tax law changes by giving appreciated assets instead of cash. Beginning in 2008, taxpayers in the 10 percent and 15 percent tax brackets pay no federal income tax on long-term capital gains (gains on assets held for 1 year or more). For single taxpayers, the upper limit is $32,550, and $65,000 for married couples. These taxable income limits include capital gains.

3. Consider giving appreciated assets, such as stocks, to adult children, parents or other relatives. For example, if you have stocks that have risen significantly in value, you could give the stocks to a non-dependent relative and let that person sell the stocks. You avoid paying capital gains on the sale, and the gain is not taxable to the donee, as long as the gain and any other taxable income does not push the donee into a tax bracket higher than 15 percent. The gift basis is your basis in the stock (your original purchase price plus any reinvested dividends).

4. Calculate how much tax you would pay on the capital gains if you sold the stock yourself, compared to the tax the donee would pay. Even if the donee is taxed on some of the capital gains, it may still be less than you would pay. Under this circumstance, the gift of appreciated assets might still result in less income tax while still benefiting the donee. Consult a CPA to help with these calculations and comparisons, as well as how you might be able to factor into the gift enough to cover any capital gains taxes the donees would have to pay.

Tips & Warnings

• Beware of other tax consequences of giving appreciated assets to senior parents. The gift might trigger taxability of social security benefits, even if they are in the 15 percent bracket. This could negate some of the benefit of the gift of appreciated assets.