Stocks for the Holidays
Gifts That Keep on Giving

by Vince Hanks (TMFElwood@aol.com)

NORTHVILLE, MI (Nov. 30, 1998) -- The end of November is upon us and you know what that means. We can look forward to bone-crushing tackles, all out blitzes, and fierce line warfare as the end of the season draws near and competition reaches a fever pitch. You guessed it. It's holiday shopping time!

But wait! Take off your shoulder pads and helmet, dear Fool. You don't have to go to the mall after all. You've been growing gifts just like a vegetable garden for some time now. Just go out a pick a few off the vine and get ready to give the most Foolish gift of all. The gift that keeps on giving -- stocks.

Imagine if all gifts had the potential to grow like shares of stock. That tricycle you gave Johnny last year, in ten years time becomes a Harley-Davidson Dyna Super Glide Sport! Susie's Easy-Bake Oven grows into an Amana Smoothtop Range! And that Super Soaker water gun you gave your nephew two years ago eventually evolves into a Patriot Missile launcher!

Okay, maybe it wouldn't always be good. By the way, The Easy-Bake Oven is commemorating its 35th anniversary this year. Celebrate responsibly!

I know what you're saying. Okay, Vince, enough with all the toys and artillery, we want some information of giving stocks and DRIPs as gifts. And what's up with the Elwood name?

I hear ya. Let's get down to the nuts and bolts of how to give stocks as gifts. We talked before about the various accounts for minors and things to consider when giving stocks to kids. Now we'll address the mechanics of gifting a stock.

If you already own shares that you wish to gift, follow these three steps (the shares you wish to give must be in your name and not your brokers-- street -- name):

  1. Secure a stock power form from a broker or the company's transfer agent. Some can be downloaded from the transfer agent's website. If you're enrolled in the company's DRIP, there may be a transfer form on the back of your statements.
  2. Fill out the stock power form (you will need the recipient's social security number) and take the form to a bank or broker to receive a medallion signature guarantee.
  3. Once the form has been stamped with the medallion, return it, along with the stock certificate (if you're holding it) to the transfer agent with a letter of instruction explaining your wishes.
It's that simple and costs little or nothing.

If you do not already own shares that you wish to gift, you may wish to:

  1. Look into Direct Purchase Plans (DSPs), in which you can buy shares directly from the company in the name of the recipient.
  2. Use a Drip enrollment service to purchase shares for the individual.
  3. Forget the whole thing and go back to the mall. Or maybe buy some shares and complete the three steps above.
There are some accounting considerations for transferring stocks that you previously owned. You may wish to print out this portion, fold it up in origami fashion and slide it under the door of your gift recipient the day after the holiday. That'll give them twenty-four hours to enjoy your generous offering before the realization hits that there will be math involved.

When given shares of stock that were previously owned by an individual, you must have three pieces of information.

  1. The donor's tax basis (or cost) of the stock.
  2. The Fair Market Value (hereinafter referred to as FMV -- and Mom wanted me to be a lawyer) of the stock at the date of the transfer.
  3. The amount of the gift tax paid by the donor, if any.
These are important because your (the recipient) tax basis in the gifted stock will depend upon the donor's basis and the FMV at the date of the gift. The rules are as follows:
  1. If the FMV of the stock is Less than the donor's basis at the time of the gift:
    1. Your basis for gain is the same as the donor's adjusted basis.
    2. Your basis for loss is the FMV at the time of the gift.
  2. If the FMV of the stock is More than the donor's basis at the time of the gift, then your basis is the donor's basis. If the donor was required to pay gift tax, your basis is increased by the amount of gift tax paid that is attributable to that gift.
I know what you're saying again. You mentioned "gift tax" twice there. What is that? Did you think you could slip that past us? The word "tax" doesn't go unnoticed!

Okay, you caught me. If the gift is $10,000 or less per individual donor, the gift is not tax deductible by the donor, nor is it taxable to the recipient. Keep the gift under $10,000.01 and you don't have to worry about gift taxes, much less know what they are. So, we won't plow into them too much here.

One final note about receiving gifts of stock. You not only assume the basis determined by the donor or the FMV, but you also assume the holding period. If you send me some shares of stock for Fool's Day (I'll provide an address later -- kidding!), I could sell the stock one day later and it would still be a long-term capital gain if the donor held the stock for at least one year.

If you have questions and comments about stocks as gifts or if you just want to challenge Vince to a game of online Stratego, please drop by the Drip message boards.

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FoolWatch -- It's what's going on at the Fool today.

11/30/98 Close

Stock Close Change JNJ 81 1/4 -1 INTC 107 5/8 -2 3/8 CPB 57 1/8 -1 1/8 MEL 63 3/16 +1/16
Day Month Year History Drip (1.69%) 9.49% 27.63% 8.69% S&P 500 (2.40%) 5.92% 19.92% 22.32% Nasdaq (3.32%) 10.06% 24.15% 22.32% Last Rec'd Total # Security In At Current 11/02/98 8.055 CPB $52.880 $57.125 09/01/98 9.727 INTC $80.238 $107.625 11/09/98 8.578 JNJ $74.090 $81.250 10/07/98 1.000 MEL $48.560 $63.188 Last Rec'd Total # Security In At Value Change 11/02/98 8.055 CPB $425.95 $460.14 $34.19 09/01/98 9.727 INTC $780.50 $1046.90 $266.40 11/09/98 8.578 JNJ $635.55 $696.96 $61.42 10/07/98 1.000 MEL $48.56 $63.19 $14.63 Base: $2100.00 Cash: $162.88** Total: $2430.08

The Drip Portfolio has been divided into 89.430 shares with an average purchase price of $23.482 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
10/24/98: Sent $40 to buy more INTC.
11/24/98: Sent $100 to buy more MEL