Ask the Expert: How should we distribute funds to adult children?

My wife and I each have traditional IRAs and Roth IRAs in addition to a joint regular stock account. We’re just entering our 80s. We’d like to start distributing some of these funds to our two adult sons instead of leaving it all to them upon our passing. I know each of these accounts is subject to different tax rules. Which account would it make more sense to withdraw the funds from?

As a rule of thumb, withdraw cash for gifts first from your brokerage account, next from your traditional IRAs and last from your Roth IRAs. That’s too much to cover in one column! Let’s discuss your brokerage account today and address the IRAs next week.

One caveat: Don’t give away more than you can afford. Remember that gifts are irrevocable. It won’t be good for your kids or for you if you give them so much that you become their financial dependents.

The first candidates for sale in your brokerage account are the losers — shares worth less than you paid for them. Next up, stocks with modest gains. The upshot: Your kids get cash and you get a capital loss that offsets your capital gains, said Ed Slott, a Rockville Centre tax accountant.

Don’t sell highly appreciated stock! Let’s say you originally paid $100,000 for shares now worth $1 million. If you sell them, you’ll owe capital gains tax on a $900,000 profit. If you give the stock to the kids and they sell it for $1 million, their taxable profit is also $900,000. But they inherit stock at its market value — so if they inherit stock worth $1 million, they can sell it for $1 million without incurring any tax.

The bottom line

Talk to your tax adviser before making financial gifts to your children.

More information

bit.ly/IRSgiftsInheritances

bit.ly/4937OYR