Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.
Although there are several strategies adults and seniors can use to preserve their assets during the estate planning process, gifting stock is one that is often overlooked. Let’s walk through some of the benefits of gifting stock, how it works, and the tax implications you and your clients should be aware of.
Read More: A Financial Advisor’s Role in Estate Planning
Benefits of Gifting Stock
The advantages associated with gifting stock vary depending on the situation. In many cases, it allows the original stock owner to avoid long-term capital gains taxes down the road. Plus, if the person they’re gifting the stock to is in a lower tax bracket and they need to access the funds, they will be able to sell the stock without hefty tax implications. As such, it is beneficial for individuals to gift stock when they are in their peak earning years to individuals who are not.
How to Gift Stock
Although there are multiple methods for gifting shares of stock, the most common one is to conduct an electronic transfer. The same goes for gifting ETFs and mutual funds. Your client may also consider using a trust to transfer stock. Tax implications vary depending on the type of trust. Additionally, stocks can be transferred upon the owner’s death. This can be done through a will, transfer on death designation, beneficiary designation on a trust, an inherited IRA, or other methods.
Like other gifts, the value of the stock on the day it is transferred counts toward the annual gifting limit of $15,000 per person. Any gifts above that amount will come from the individual’s lifetime gift and estate tax exemption. This limit is currently $11.7 million per person for federal estate taxes.
Read More: How Does the Gift Tax Exclusion Affect Medicaid Eligibility?
Tax Consequences of Gifting Stock
As long as the gift is within the owner’s annual gifting limit, there are no tax implications. If the gift puts them above their annual limit, they will need to file an estate and gift tax return, but there are still no tax consequences. However, if the gift exceeds their lifetime gift and estate tax exemption, the individual gifting the stock will incur tax consequences.
On the other hand, the individual who receives the shares may owe capital gains taxes when they sell the shares. This tax liability depends on the cost basis and holding period of the original owner. For instance, if the price of shares increases beyond the original cost basis or are sold at a loss, the original owner’s cost basis and holding period will impact the resulting capital gain. However, if the shares are sold for a price above fair market value at the time of the gift but below the original cost basis, the recipient of the shares will not experience any gain nor loss.
How Does Gifting Stock Impact Medicaid Eligibility?
Since it is inherently a gift, giving stock shares away will count as a divestment. Therefore, if your client gifts stock within the five years prior to applying for Medicaid, they will incur a penalty period of ineligibility. However, if you have a single client who is utilizing the Gift/MCA Plan, stock shares could make up a portion, or all, of the gift they make to their loved one as part of the strategy.
In the end, gifting stock shares may be a useful estate planning tool for adults or younger senior clients who are in their peak earning years, and stocks can also be gifted as part of the Gift/MCA Plan. Keep this in mind as you discuss asset-protection strategies with your clients. If you’d like to explore other strategies, specifically those relating to long-term care planning, reach out to our team at The Krause Agency.
