Giving mutual funds to grandchild

[Thecamaro15fast]

I am retired and have Mutual Funds I have had for years. Being S&P Mutual Funds I have not paid a lot of taxes on them because they did not trade. I kept it  totally legal. I would like to give my grandkids some of the funds without myself paying taxes or having them pay taxes. I do not want to sell them I think. Is this possible? What do I need to know? It would be $10,000 or less or is there a limit.?

[JohnS_CPA]

Gifts of stock or in your case a mutual fund can be made in lieu of giving cash. The annual gifting limit of $15,000 per person ($30,000 for a joint gift with your spouse) apply, and the value of the mutual fund on the day of the transfer constitutes the amount of the gift. 

Gifts in excess of the annual gifting limits will use part of your lifetime gift and estate tax exemption, which is currently $11.7 million per person for federal estate. A gift tax return would be filed to report a single gift in excess of $15,000. To be clear the $15,000/$30,000 limit is per person so you can gift $15,000/$30,000 to each grandchild without any filing requirement.

If the gift is $10,000 or less you will have no tax issue. Contact your mutual fund compay and have them take care of the transfer by opening an account in the name of your grandchild and moving the shares into each grandchild's name.

If the grandchild is under the age of 18 the account would need to be a UGMA account. Again the mutual fund company should be able to take care of the trasnfer for you. 

This is a great idea in lieu of selling the funds, paying taxes on any gains and then gifting the proceeeds. 

Your grandchild will inherit your basis and holding period so be sure to compute your basis (your cost plus any reinvested distributions) at the time of the gift. Then provide your grandchild and/or parent with your cost basis, purchase dates and value on the date of the gift. This will allow them to properly and easily prepare their tax return when they eventually sell the mutal fund. 

[Opus 17]

Remember that someone always has to pay the tax (except in the case where you die and your grandkids inherit the assets.)

In short, if you give them stocks, then whenever they sell them, they will owe capital gains tax back to your original purchase price.  If you do this, make sure you give them as much paperwork as you can from your broker proving what you originally purchased, plus any basis adjustments over the years.  If they sell the securities and can't prove your cost, they will owe capital gains tax on the entire amount. 

You will be required to file a gift tax return if the amount of the gift is more than $15,000 per person per year.  However, no tax is actually paid unless your lifetime total of gifts given is more than $11 million.  The gift tax return allows the IRS to track the gift against your lifetime limit.  If you are married, you can also give each child $15,000 in the name of your spouse without triggering the gift tax return requirement.  

Also important:  If you go into a nursing home, Medicare does not pay and you have to apply for Medicaid.  Medicaid will require that you disclose all large gifts you made in the past 5 years, and will reduce your Medicaid benefit or require the gifts be partially paid back to you before they will cover you.

You may want the assistance of an Elder Care Attorney to plan how to gift and manage your assets for everyone's benefit without being vulnerable to the government claw back.