Friday, September 18, 2015

How to get more income from highly appreciated stocks

As folks live longer and their stocks increase in value, retirees look for ways to increase their income to maintain their standard of living and sometimes provide cash gifts and support to their children and grandchildren. I think that at every investment conference I have attended in the past few years, one of the main presentations centered around how to provide income in our current low-income environment and still protect against risk.
I’ll discuss three ways to increase your income: sell some of your stocks, borrow against them and use a bona fide charitable gifting technique.
1. Sell stocks: You may not want to sell any of your highly appreciated stocks because you want to keep the dividends and defer the capital gains tax. You know that if you defer those capital gains until you die, your beneficiaries will enjoy a new, stepped-up cost basis, eliminating that tax. (Not true if the stocks are in a bypass — aka exemption — trust). You should ask your tax professional what tax you would have to pay on long-term capital gains. You might be pleasantly surprised. Capital gains tax depends on your income. Although the maximum rate is 20 percent (not including the 3.8 percent Net Investment Income Tax), most taxpayers actually have a 0 percent to 15 percent federal tax rate on their long-term capital gains.
2. Borrow against your stocks: For most retirees, this option won’t make financial sense. The interest rate you pay will probably be twice the rate of dividends that you are earning, meaning you are losing money. And if you die with the loan still in force, your estate will have to pay it off. Borrowing with stocks as security, usually done through your broker using a margin account, is OK for a short-term loan, but never a good idea for providing income over a long period of time. And the IRS won’t let you deduct the margin interest unless you are using the loan proceeds to buy investments.
3. Charitable Remainder Trust (CRT). An excellent way to provide income from appreciated stocks and avoid capital gains tax is to set up a Charitable Remainder Trust (CRT). A CRT is an irrevocable trust. You give your stock to the CRT. The CRT sells the stock, pays no tax and pays you an annual income. When you die, the money in the CRT goes to charity. The advantages of the CRT are: (1) A higher annual income than you can get now, (2) an immediate tax deduction for the gift, (3) the removal of the stock from your estate for estate tax purposes, and (4) the gratification of giving to the charity or charities of your choice while you are still alive. Ask your attorney, your favorite charity or your local community foundation.