Ask the experts: Mom knows best on tax deductions for gifts

Published 12:00 am PDT Sunday, May 11, 2008
Story appeared in BUSINESS section, Page D1

It's Mother's Day. So in honor of the occasion, we've rounded up a couple of financial questions from our online "Ask the Experts" panel that revolve around – who else – moms.

Trudy Nearn, wills/probate/estate planning

Q: My mother has a trust but was raised in the Depression so is unsure how to handle stock profits. In the last 30 years, she has made over $500,000 in the stock market and has ample funds to live on. I heard that she can give her kids and grandchildren up to $12,000 per year (from her stock profits) without paying gift taxes, which will help her pay less in taxes. She does not believe it. Would it be more beneficial for her to give the actual stock as a gift and have the relative pay the capital gains taxes? When she gifts stock to her kids, does it get a new cost basis as of that date?

A: It might make your mom happy to know that she is right. There is no income tax deduction for a gift, so there is no tax benefit to her when making a gift. There may or may not be a tax benefit to you. If your mom has assets (net of mortgages and other debt) above the $2 million limit that would incur an estate tax upon her death, then making $12,000 gifts to her children now will reduce the total estate. This saves taxes for you at her death. If her net worth does not exceed the $2 million estate tax exemption, there is no tax benefit to the gift.

There is a downside to receiving a gift of appreciated stock. You would get hit with capital gains taxes should you decide to sell any shares that have increased in value since your mother purchased them. If she dies owning the stock, your new cost basis is the stock's value at on her date of death.

Both of you can avoid the capital gains on the sale of appreciated stock if you receive it at her death rather than by gift. There are factors that affect whether your mom gets the full $2 million as an estate tax exclusion. There are also nontax reasons why your mom might want to make a gift. She can work with her estate planning attorney or accountant to address these issues.

Bruce Kajiwara, investments

Q: My parents, in their late 80s, have sufficient income from a pension and Social Security to meet their living expenses. When maturing annuities resulted in high income taxes a couple of years ago, my father was advised to "roll over" an annuity into another variable annuity. This does not seem appropriate at my parents' age. Are there other measures my father could take to reduce taxable income?

A: Without more details I cannot determine the appropriateness of rolling over annuity proceeds into another variable annuity. However, if the proceeds from the annuity were not needed to meet living expenses, and the desire was to avoid paying any income taxes, the transaction your parents entered into could accomplish that result. This "roll-over" was likely a 1035 tax-free exchange, whereby the proceeds are placed in another annuity investment.

Another option would have been to cash in the annuity and pay any taxes due, or elect a systematic withdrawal of the annuity proceeds.

Since a new variable annuity has been purchased, don't wait to check into the "details." Questions such as surrender period, surrender fees, maintenance costs, etc., should be understood to enable proper planning for the future. On behalf of your parents, I would again ask the adviser why this was considered best for your parents at their age.

Another investment to consider for reducing taxable income is tax-exempt bonds, depending on your parents' tax bracket. You may also wish to consult your tax adviser for additional advice.

– Compiled by Claudia Buck