Gifting Money to Our Kids

[EastWest Gal]

My point exactly, and not what I experienced.

My goal is to make sure DS has some access to the money when he needs it, not when he is 50-60 years old and financially secure. I'm still bothered that my dad charged us 8% interest in 1991, far more than what the IRS required for loans to family, with a baby on the way and with me, the bread-winner, pregnant with his first grandchild, on bed rest due to preterm labor.

Family mattered less to him than his money, until I dragged him into a local lawyer's office when he was 74 and the lawyer said he needed to set up a gifting program to his grandkids, or risk the government taking a larger chunk than it did. And with my help, he did that. It was only the tax consequences of his self-centered point of view that allowed him to pay attention to the tax consequences of his decisions.

I think this is partly why I want to provide some to my son long before I croak. Because he can use it now, and I don't need that amount, now, or ever.

 

[Souschef]

My point exactly, and not what I experienced.

My goal is to make sure DS has some access to the money when he needs it, not when he is 50-60 years old and financially secure. I'm still bothered that my dad charged us 8% interest in 1991, far more than what the IRS required for loans to family, with a baby on the way and with me, the bread-winner, pregnant with his first grandchild, on bed rest due to preterm labor.

Family mattered less to him than his money, until I dragged him into a local lawyer's office when he was 74 and the lawyer said he needed to set up a gifting program to his grandkids, or risk the government taking a larger chunk than it did. And with my help, he did that. It was only the tax consequences of his self-centered point of view that allowed him to pay attention to the tax consequences of his decisions.
I think this is partly why I want to provide some to my son long before I croak. Because he can use it now, and I don't need that amount, now, or ever.

I agree 100%. That is exactly what I am doing.

 

[Sunset]

If you gift stock to your son you are also transferring the cost basis to him. When he sells the stock he will have to pay tax on the gains.
If you sell the stock and give him cash, you have to pay the capital gains tax on the sale.
...

Would this work:
Since the son probably has a lower tax rate, seems after the transfer of stock/fund, he could sell the stock/fund and buy some other good stock/fund, collecting the LTCG tax free and resetting the basis (on the new buy similar stock/fund).

 

[EastWest Gal]

You are correct. He’s not working full time yet, so his cap gains rate this year could be 0%. He has his Roth IRA in Vanguard funds at Schwab. The other thing he can do is transfer some of the gift into his Roth IRA for his annual contribution, then sell the fund and buy more of his Vanguard funds with no cap gains no matter what.

Our funds are in DFA index funds, so they’re not bad but they are no longer the lowest cost funds. At his young age he is 100% in stock funds.

We are in the 15% cap gains bracket and he will be also if he finds a full time position. He’s been sending in applications at a rapid rate. Who knew that finding a job as a music teacher would be akin to applying to a prestigious medical school?

 

[SecondCor521]

You are correct. He’s not working full time yet, so his cap gains rate this year could be 0%. He has his Roth IRA in Vanguard funds at Schwab. The other thing he can do is transfer some of the gift into his Roth IRA for his annual contribution, then sell the fund and buy more of his Vanguard funds with no cap gains no matter what.

Our funds are in DFA index funds, so they’re not bad but they are no longer the lowest cost funds. At his young age he is 100% in stock funds.

We are in the 15% cap gains bracket and he will be also if he finds a full time position. He’s been sending in applications at a rapid rate. Who knew that finding a job as a music teacher would be akin to applying to a prestigious medical school?

Emphasis added.

I'm fairly certain this is not allowed. IRA contributions must be in cash (well dollars - it can be a check or an ACH or a wire), *not* stock.

And I think it's for the reason you might expect. Allowing stock contributions to IRAs would either avoid or require rules for dealing with the unrealized (and more importantly untaxed) capital gains.

@Sunset, yes, if the stock is transferred to the kid and the kid sells, then it's taxed at the kid's capital gains rates (and probably at ordinary rates at the state level). There is something called a kiddie tax which IIRC heavily limits this maneuver between parents and kids under 18 or so because people were abusing the rules. But if the offspring is an adult I'm pretty sure it works.