Question: I retired recently after 37 years with a large company. My wife is a retired school teacher with a pension and a contributory plan. I have a pension and quite a bit of stock that I purchased over the years using stock incentive plans. My wife and I would like to start a gifting program by giving $11,000 to each of our three children and four grandchildren using some of the stock that I bought at comparatively bargain prices. Currently, our wills leave everything to each other and, at the second death, equally to our children. Together, we have about $2 million in assets, and income of nearly $100,000. But we understand that gifts are taxable to our children. Is this correct? Do you think we should talk to our accountant before we begin making the gifts?

Answer: In today’s uncertain times, we would almost always recommend that you seek professional guidance before giving away your money and assets. Lifetime gifts can be an important part of your planning strategy that provides current benefits to those who receive the gifts and reduces federal estate taxes if, at the time the last of you and your wife die, your taxable estate exceeds the threshold established by law – now $1.5 million. In addition to potentially saving taxes after the last of you and your wife die, you may realize income tax savings now if you gift dividend paying stocks to family members who are in lower tax brackets than you are.

Contrary to what you have heard, your children and grandchildren, as recipients of gifts, are not taxed. Based on current law, you and your wife can each gift up to $11,000 each year to an unlimited number of people with no gift taxes due. These gifts can be in money or property. By giving $11,000 per year to each of a number of recipients, you and your wife will be taking advantage of “the annual gift tax exclusion.” Because you are married, you and your spouse together can gift $22,000 to each of your children, and $22,000 to each of your grandchildren each year. With seven potential recipients (three children and four grandchildren), this totals $154,000 per year!

But if you gift more than $11,000 to any one person – or if you and your spouse give away more than $22,000 to any one person in any year, you and your wife will be required to file a gift tax return. There will be no gift tax due unless and until you use up your lifetime exclusion. On the other hand, gifts between spouses -- regardless of amount -- are nontaxable. So, too, are certain tuition and medical expenses that you may pay on behalf of another.

The greatest tax disadvantage of making gifts of stock to your children and grandchildren is that they will lose what is called "stepped-up" basis. This can be best explained by an example: If you paid $1.00 per share for stock that is now worth $11.00 per share, and you sell 1,000 shares, you would realize a $10,000 capital gain ($11,000 sales price minus $1,000 cost) and pay capital gains taxes on the gain. If you make a lifetime gift of the same property to your son, he would “stand in your shoes” and, if or when he sold the stock in the future, he would realize a $10,000 gain. On the other hand, if you willed your son the same stock, based on today’s law, he would receive it with a tax basis of $11,000 – just as if he had paid for it – and could sell it and realize no taxable gain.

The greatest disadvantages to you and your wife include the prerequisite that to make a valid gift, you must give up all control over the gifted property so there are “no strings attached.” That’s why you should be sure that you keep enough assets to allow you to take care of unexpected expenses for your care and quality of life or increased costs of living. Or, there could be possible family problems if one child sees the gifts as being made in unequal proportions. And making gifts can also have an impact on your eligibility for nursing home medical assistance.

As you see, deciding to make significant gifts involves consideration of many personal and tax factors. If you have the inclination or the need to institute a gifting program, you should be speaking with your accountant and financial adviser to determine whether it truly is better to give than to receive.