Cents and Sensibility

Guy Steele

Saturday, November 27, 2004

Money makes a great gift,
but learn the rules first

WITH the holidays upon us, you're probably spending time looking for the right gifts for your loved ones. This year, why not skip the hassles and, at the same time, give a gift that can improve the recipients' financial outlook?

Before you gift-wrap those 100 shares of Company XYZ stock, however, you'll want to know a few things about making this type of transaction. Both you and your loved one will benefit more from your gift -- if you know the rules.

When you give a financial gift to another individual, you won't get a tax deduction, but most of the time you won't have to pay a gift tax, either. However, if you give more than the "annual exclusion amount" ($11,000 for 2004) to one person (other than your spouse) in a single year, you'll have to file a gift tax return. But you probably still won't need to pay a gift tax; you can give up to $1 million during your lifetime before you incur these taxes. And you won't use up any of this amount until your gifts to one person in one year exceed the annual exclusion amount. So, for example, if you make a $15,000 gift in 2004, you have used up only $4,000 of your lifetime limit.

Any amount you use out of your lifetime gift tax exclusion counts against the estate tax exclusion, which is $1.5 million for 2004 and 2005. So, if you use $200,000 of the limit by making gifts during your lifetime, you have reduced by $200,000 the amount that can pass through your estate free of the estate tax. (The estate tax is scheduled to be repealed in 2010, but this could change. In any case, see your tax advisor before making any substantial financial gifts.)

Once you know the gift tax rules, you can decide how much stock you want to give as a present. You'll need to know what you originally paid for the stock (its cost basis), how long you've held the stock and the fair market value of the stock at the date of the gift. Recipients will need this information to determine capital gains or losses when they decide to sell the stock you've given them.

You don't have to actually give stocks to help your intended recipients make progress toward their financial goals -- specifically, toward a comfortable retirement. As an alternative, consider giving your loved ones money to add more shares of stock (or bonds or other investments) to their IRA. For 2004, investors may be able to put up to $3,000 in a Roth or traditional IRA (or $3,500 if they are 50 or older). If your intended recipients have fully funded their IRAs for 2004, they can apply your gift for 2005, when the IRA contribution limit is $4,000 (or $4,500 for those 50 or older).

By giving stocks or other financial gifts, you can brighten the holidays for those you care most about -- and your generosity will be felt for years to come.

See the Columnists section for some past articles.

Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688



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