$ ?s: Gifting to the Grandchildren

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Money QuestionsQ: I inherited shares of five stocks from my parents, who died many years ago. I am now 70 years old and would like to gift them to my grandchildren. How do you recommend I do this?

Sincerely, Gifting Granny

$ ?s answered by Matthew Illian, CFP®


Dear Gifting Granny,

My first priority would be to encourage diversification. If you inherited these stocks, you are likely attached to them for no other reason than your own parents picked them out. Don’t pass this false expectation on to any more generations. Nothing will scare a young mind from any interest in saving and investing for the future like seeing one of Great Granny’s stocks go bankrupt.

Financial gurus have argued for years over the appropriate number of ways to divide a portfolio, but all of them agree that five is not enough. Some recommend 30 to 40 positions. Others recommend hundreds, and I prefer diversifying among thousands of companies. This will require selling some of your stock positions and reinvesting in mutual funds or exchange-traded funds (ETFs) that provide greater diversification.

The next factor you need to consider before gifting is taxation. If you gift those stocks to your grandchildren now, they will inherit your current basis. This means they may receive a larger tax bill at the time of sale.

You can avoid passing along a larger tax liability in two ways. You could sell the stocks before gifting and pay the capital gains tax bill yourself. Or you could leave a portion of them to the grandchildren in your will. Securities inherited at death receive a full step up in basis, which means your grandchildren would not have to pay a capital gains tax if sold at that time.

Gifting stock or mutual funds to a minor requires that the young person open a custodial account, and a parent or guardian will need to be involved in this process. If you are willing to sell the stocks, you may find it more beneficial to put the money into a college 529 savings account. This would allow your grandchildren to be beneficiaries of the account, but you or your children could be the owners.

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Matthew Illian was a Wealth Manager at Marotta Wealth Management from 2007 to 2016. He specialized in small business consulting, college planning, and retirement plans.