Retirement & Financial Planning Report

Some families may benefit by transferring assets from adult workers to retired parents. In particular, it may make sense to give away dividend-paying stocks to low-income seniors.

Suppose, for example, that Walter and Alice Lee are in the 35 percent tax bracket. They have been helping to support Alice’s widowed mother, whose income is only around $25,000 a year. Typically, they send her a few thousand dollars in cash, from time to time.

Instead, Walter and Alice decide to give her mother $100,000 worth of dividend paying stocks. Walter and Alice have owned these shares for many years; they originally paid $40,000 for them. Thus, on a sale the Lees would owe tax on a $60,000 gain.

Suppose the transferred stock pays a dividend of 4.5 percent. After receiving the gift of shares, Alice’s mother will receive $4,500 per year in extra income: 4.5 percent of $100,000. Under current law, single taxpayers with taxable income up to $34,500 owe 0 percent tax on most dividend income in 2011. Therefore, Alice’s mother will owe no tax on the dividends.

Moreover, Alice’s mother can state in her will that Alice will inherit those shares she now owns. If Alice’s mother dies more than a year later, at a time when those shares are worth $120,000, Alice will have a $120,000 “cost basis” in the inherited shares. She can sell the shares for $120,000 and owe no tax, so no one will ever owe capital gains tax on the shares’ appreciation from the original $40,000 purchase price.