Ask Linda: Gifting Stock to my Child

Ask Linda: Gifting Stock to my Child

I am a widow and want to gift some of the individual, concentrated stock in my brokerage account to my only child, my adult son. I am tired of managing the stock and feeling like I need to stay on top of the earnings reports, news, etc. I would rather gift it to him and have the rest of my portfolio in low-cost, diversified positions. The stock has a very low basis and will incur a large amount of long-term capital gains upon selling. What are your thoughts?

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Personal Finance For Children

When it is relevant for a client, PWR financial plans include a section on personal finance for children.  We compile information from a few sources including Money as You Grow.

Here are some age appropriate activities I started doing with my 3 1/2 year old.

1)  Identify what costs money versus what is free.  For example, we pay money when we go to the local pool.  We don't pay money when we go to the library, park or the beach.  Those are free activities.

2)  Explain that people can get money by working.  Mommy and Daddy go to work to get money.  A couple of neighborhood kids were selling snow cones one day - they were working too!

3)  There is a difference between what we need versus what we want.  We need to buy fruits and vegetables at the store or farmer's market.  We don't need to buy lollipops and cookies.  Those are special treats we get every once in a while.  We need a place to live and a car to drive, but we don't need an automatic bubble maker (yes - these exist!) or a new scooter.  Those things are nice to have, and we may want and enjoy them, but we don't need them.

Use these examples or create your own using the Money as You Grow site as a start.

Are you eligible for the American Opportunity Tax Credit?

If you paid for higher education costs in 2013, be sure to speak with your tax preparer to see if you may benefit from this credit. What is it?

The American Opportunity Tax Credit (AOTC) modifies the Hope Tax Credit. It allows you to take a tax credit for qualified higher education costs including tuition, certain fees and course materials. See IRS Publication 970 for a complete list. It does not include room & board.

How much is it?

The credit amount is 100% on the first $2,000 of expenses and 25% of the next $2,000, so $2,500 max per year.

How long can I use it?

For four years! This is better than the Hope credit that could be used only for two years.

What exactly is a tax credit?

A tax credit reduces your tax liability dollar for dollar. It is preferable to a “deduction” which reduces your taxable income.

Can anyone claim it for higher education costs for themselves or a dependent?

If you are filing singly, your modified Adjusted Gross Income (AGI) has to be less than or equal to $80,000. For married folks filing jointly, the number is $160,000. After these income levels, the credit starts to phase out until it is no longer available.

How do I claim the credit?

Complete form 8863 and attach it to the 1040 when you file your tax return.

What if I only used 529 plan money for education expenses?

You can’t double dip. That is why I recommend that my clients use their own funds for the first $4K to make sure they can take advantage of the credit, then 529 funds after that.


Using a 529 Plan to Help a Grandchild Pay for College

When grandparents want to help pay for a grandchild’s education, they can choose a method that is just as beneficial to them as it is to their grandchild. With smart planning, grandparents can save taxes using a tax-preferred vehicle like a 529 plan. If they choose a 529 plan, it is important to understand the implications of having grandparents as owners instead of the child’s parents. Tax-deferred 529 plans have an account owner and a beneficiary. Typically, a parent is the account owner and a child is the beneficiary. This allows the parent to retain control over the account, preventing the child from making poor decisions with the money, like buying a new car. When determining financial aid eligibility, it is usually better for a parent to be the owner of the 529 account. While this calculation can get complicated, in general, parents are expected to contribute 5.64% of their eligible assets annually towards their child’s tuition. Retirement assets are not counted. The student is expected to contribute 20% of her assets. This is why it is typically recommended to spend down the child’s assets first, if they have any. Grandparents’ assets don’t count at all. So why would you not have the grandparent set up a 529?

The catch is this: If a distribution is taken from a grandparent owned 529, the distribution amount needs to be reported as income on the student’s financial aid form the following year. This can reduce the student’s financial aid amount by up to 50% of the distribution amount. So if $10K was distributed, the aid amount can be reduced by as much as $5K. If financial aid is not a possibility in your situation, this nuance doesn’t matter. If it is a possibility, hold off on taking distributions from a grandparent owned 529 until the last FASFA form is filed, typically the middle of the student’s junior year.

Another way for grandparents to contribute is to simply gift money (within gifting limits) to the parents to be used for college. It will affect the aid amount since it is the parent’s asset as discussed, but not by much. Here are some more pros and cons to having a grandparent owned 529. Be sure to consult with your financial and tax advisor to understand what is best for your specific situation.

The Dark Side of UTMA Accounts

With this next post, I wanted to share an issue I have seen a couple times within the last few months. Parents have called asking how to postpone their child from receiving a UTMA account at age 18. The answer is, you cannot postpone the inevitable. Minor children cannot legally hold mutual funds, stocks, bonds and life insurance policies. If parents want to transfer these to their children, they have the option to set up a UTMA (or UGMA) account for them. The issue is that this money needs to be handed over to the child at the age of majority (age 18 or 21 depending on the state).

This may seem in the distant future when you are holding a newborn in your arms, but the reality is that the age of majority, whether 18 or 21, is still incredibly young. Not surprisingly, there are some young adults that are just not ready or responsible enough to receive a lump sum.

UTMA funds are irrevocable gifts. The article below is a good overall summary of UTMA’s. It mentions that one option is to spend the money for the benefit of the child before the age of majority. You would need to use the money for items other than parental obligations and work with a qualified accountant.

An alternative vehicle for parents looking to gift assets to their children is a 529 account. It is often the one I recommend. While it also has its limitations, when presented with the pros and cons of each, parents often choose the 529.

I recommend meeting with a financial planner to review your specific situation and see which vehicle may be better for you.

Can We Teach Our Kids Delayed Gratification?

I came across something interesting while reading Thinking Fast & Slow by Daniel Kahneman. He talks about an experiment conducted among 4-year-old children. They were given one Oreo. They could eat the Oreo now, or wait 15 minutes before eating it, and they would get a second Oreo. While waiting, they had to remain alone in a room without any distractions (books, puzzles, video games, etc.) About half of the children managed to wait. These “resisters”, 10-15 years later, were more successful (defined as less likely to take drugs and having substantially higher test scores). Another, similar, experiment can be found on Ted TV here.

This experiment is fascinating to me because a lot of financial planning is about delayed gratification. I see adults that are resisters. They can easily adjust their lifestyle as needed when children are born or when a spouse loses a job. I also see those who struggle with impulsive spending and prioritizing wants vs. needs.

I spoke with Kathryn Mercurio, MSW, who practices in the greater Boston area. She provides some great tips for teaching kids delayed gratification:

1. Set a good example – While shopping with your children, show them that everything you buy has meaning. For example, use a shopping list and stick to it.

2. Teach mindfulness - Help children become aware of their thoughts, emotions, body sensations, and the surrounding environment. When your child seems distressed, ask them what they are thinking. If they are old enough, have them write down every thought that goes through their mind. You can help them challenge/reframe thoughts that may be distorted or irrational. For example, "I can't go on unless I get the new iPhone. I will be the only girl in school without a smart phone and everyone will think I'm a loser."

3. While parenting, practice healthy emotional regulation – By giving children treats or TV time to calm them down during tantrums, we may be making it more difficult for them to self-soothe or emotionally regulate and thus, learn delayed gratification. Try instead to give your child some time to regulate their emotions. Show them you believe in them and teach them to sit with their distress. You can say something like, "I know you are mad right now. I will sit next to you and we'll wait together for this mad feeling to pass."

4. Teach your child how to make informed decisions - Your 10-year-old tells you he's changed his mind about his goal of saving towards a skateboard because he wants to buy a new hat that has become the hottest new trend. You might ask him these questions: What led you to this new choice? How will you feel after you have bought the hat? How will you feel 2 weeks after you buy the hat? Will you regret not buying the skateboard down the road?

I have a couple more suggestions for the list:

5. Provide a weekly allowance – Start teaching your child money skills with their income. Suggest (or require) they use a portion for short-term items, like going to the movies with friends, a portion for more expensive wants, like designer jeans, and the balance for the future, like college savings.

6. Consider sharing your budget – I have a neighbor who was a single Mom for a while. Money was tight and she was always fighting with her daughter about purchases. She sat down and showed her daughter what money comes in each month and what money had to go out for necessities. The woman said her daughter just “got it” and wasn’t resentful or upset. The daughter now applies those skills in her own life.

Personally, I can’t wait until my daughter turns 4 so I can do the Oreo experiment with her. ☺

Baby’s 1st Year: Reduce the Financial Strain

It can be very easy to get overwhelmed with a new baby coming.  Everyone is excited to offer advice on what you “need” to have.  And after one trip to Babies "R" Us, you realize that baby supplies (while small and cute) aren’t cheap.  Here are some tips to keep the first year costs from ruining your budget.

  • Register for gifts before the baby.

I was hesitant to do this for our wedding, as well as for our baby.  I felt like registries were impersonal and like I was saying “buy this for me please”!  The fact is, people want to get you something you actually need.  Left to their own devices, they will likely get you clothes.  That is fine, but many people find themselves with an abundance of clothes – some of which are hardly used.  Family members and friends are thrilled to be able to chip in on a big-ticket item like a jogging stroller or baby swing.   Plus, registering is a great way to stay organized with what you want and what you have already received.

  • That being said - don’t overdo the registry!

The best book I got as a gift was “Baby Bargains”.  (I don’t receive anything for saying that).  Towards the back, they had a sample registry for a minimalist.  I just followed that list and knew I could supplement as needed.  It probably kept me from having to run around returning a lot of things with a newborn. 

  •  Resist the urge to buy or register for clothes.

Everyone loves buying baby clothes!  My advice - get your fix when buying clothes for other people’s babies as gifts.   You will likely get more clothes than you could have ever imagined and if you have to supplement, check out your local baby thrift store.  There are so many cheap clothes there that were hardly (if ever) used.

  •  More about thrift stores….

We had a thrift store near us while growing up.  All I remember was the horrible smell and outdated clothes.  Times have changed!  We have a baby thrift store down the street in Mission Valley that is incredible.  It has baby clothes, toys and even maternity clothes.  When our daughter was first born, she didn’t fit into any of the 0-3 month clothes we had.  So my husband went and bought a handful of newborn outfits for a total of $10.  She only wore the clothes for a couple weeks, so why pay 4 times as much elsewhere?  You can of course also check out Craigslist or swap with a friends, but the thrift store may give you more options in a pinch.

  •  Add a line item in your budget for miscellaneous kids items and stick to it. 

If you register and have a baby shower, you should have plenty of things for at least the first few months.  But after that you will be amazed by everything you need to keep buying.  By having a budget (as with everything) you are more likely to resist buying items that aren’t necessary.  If you don't use up your budget amount one month, save the difference.  You will need it for bigger items like the upgraded carseat at 1 year.

  • Start talking about college.

Yes, it is 18 years down the road, but most people need to get a college degree if not more these days.  You and your spouse need to be in agreement about what your intentions are.  Do you want to pay for your child’s undergraduate education?  What about graduate school?  Do you want them to work through school like you had to?  Do you want to plan for paying 50% of the costs?  Start saving now if you plan to foot at least some of the bill and there will be a lot less pain in the future.

  •  Set up a savings account and notify family members.

Whether it is a 529 or other savings plan, let your friends and relatives know you set something up for your child.  A contribution to the account is a great idea for holidays or a child’s first birthday.  When kids are that little, they can’t really appreciate tangible gifts anyway.

  • Meet with a financial planner.

If you haven’t already met with a financial planner, get moving!  It will be so helpful to have your family goals and financial plan in writing so you can stay focused during this incredible but busy year.