"Selling" stocks to my wife

[dragoncar]

My wife and I maintain separate finances.  I'm currently RE (or taking a break, prefer not to label it but I ain't working) while my wife is still saving for FI and doesn't plan to RE because she has a fulfilling job (she works part time already).  Not really looking to get into debate over separate finances or RE for one spouse while the other works.

The upshot is that I've been selling investments to obtain cash to cover both my personal expenses (e.g., eating out alone, clothes, toys) and joint expenses (mortgage, stuff for kid, etc.).  Even working PT, my wife has a decent savings rate and is investing aggressively.  For a long time I was able to tax-loss harvest but now I'm looking hard at capital gains.

I'm thinking it's kinda silly for me to sell stocks and pay capital gains while my wife buys the same stocks (not exactly the same, wash sale doesn't apply so far).  So what if I just transfer ownership of the stocks to her and she gives me the cash?

A few questions arise:

1) Does this create it's own taxation issue?  Gifts between spouses are entirely tax free, but how about formal business arrangements?  How about informal arrangement?

2) On that note, would it make sense to actually transfer the assets to a different account or just keep track internally?  Maybe transfer to a joint account for ease of transfer and internally assume it's her account.  Although we maintain separate finances, it's a loose arrangement for the purpose of letting each spend as they like (e.g., she contributes a lot to her family while my family doesn't need any help), less important that it's legally searate (although her lawyer might disagree!).

Perhaps it's not worth any of this hassle and I should just pay my 15% or whatever it is. 

[EricEng]

Gift/transfer stock to her.  Gift money back.  All free.  Why make it more complicated?  Govt only cares you are married, not how divided your finances are in reality or which bucket the money is in.

[dragoncar]

There's also the matter of basis, in that she would be receiving my crappy basis.  We'd have to account for that somehow too. 

Looking at interactive brokers because they don't charge fees on position transfers.  But there seem to be some title requirements on the ACATS, name on account has to match.  Fidelity has a form I can fill out in person, but this would ideally be a monthly affair (although we could work out annually I guess but then they require a Medallion Signature Guarantee which is a PIA)

[dragoncar]

IB does not appear to allow transfers to differently-titled accounts (although there seems to be a way to transfer from separate to joint accounts)

Vanguard has an online form but I couldn't complete it since we don't have taxable accounts there.  They have a mail-in form that also requires Medallion Signature Guarantee for gifts to individuals.  I'm doubtful that the online form would let me process the transfer (I'd have to open an individual taxable account at Vanguard, ACATS from IB to Vanguard, and then gift form at Vanguard)

I do understand WHY these brokers have a lot of hoops for security.  But compared to my Ally cash accounts, where we regularly just transfer money to/from our joint account as needed it seems way more complicated.

[norajean]

Gifting works. See IRS Pub 550.  She gets your basis and eventually pays the same tax you would have paid.  If she is in a higher tax bracket, it might have been wise to gift her the shares with the tax losses also.

However, you don't have to gift them to her now. You can "gift" her the shares informally with a spreadsheet you both acknowledge.  The shares remain in your account but are "hers" as of the date of the transfer.  If and when she needs you to transfer what you owe (eg after she retires or if you split up) you can do it all in one fell swoop.  If that day never comes, you just sell them yourself on the day needed to cover joint expenses until you two are square in the books.

[dragoncar]

Gifting works. See IRS Pub 550.  She gets your basis and eventually pays the same tax you would have paid.  If she is in a higher tax bracket, it might have been wise to gift her the shares with the tax losses also.

However, you don't have to gift them to her now. You can "gift" her the shares informally with a spreadsheet you both acknowledge.  The shares remain in your account but are "hers" as of the date of the transfer.  If and when she needs you to transfer what you owe (eg after she retires or if you split up) you can do it all in one fell swoop.  If that day never comes, you just sell them yourself on the day needed to cover joint expenses until you two are square in the books.

Thanks for the irs pub reference.  I’m leaning towards the spreadsheet just because the transfer looks too painful to square up more than annually.

[terran]

We do some transferring between accounts titled in different ways for state tax purposes, so I can tell you that at least at Fidelity, if you have a joint account you can transfer between that account and individual accounts so it would require two steps, but you could do this all online without having transfer stocks from one individual to another (I think you'd have to call in or fill out a form for that) by using a joint account as an intermediary between individual accounts.

As you've mentioned, you should give her more investments than she gives you cash since she'll have taxes on your lower basis.

[dragoncar]

We do some transferring between accounts titled in different ways for state tax purposes, so I can tell you that at least at Fidelity, if you have a joint account you can transfer between that account and individual accounts so it would require two steps, but you could do this all online without having transfer stocks from one individual to another (I think you'd have to call in or fill out a form for that) by using a joint account as an intermediary between individual accounts.

As you've mentioned, you should give her more investments than she gives you cash since she'll have taxes on your lower basis.

Just to make sure I understand you correctly, you've transferred stock positions (without selling) from individual to joint, and vice versa, online at Fidelity, with no additional forms needed?  That would work well for us.

In a beautiful world, when she sells we can be in the 0% capital gains bracket....

[terran]

Correct. Just use the "Transfer" tab and select to transfer shares from your individual brokerage account to a joint account in both your and your wife's name. Then your wife will be able to log in and transfer shares from the joint account to her individual account. There are holds so you can't transfer recently purchased shares until they settle (3 days for ETFs I think), but as long as you're not buying/selling you should be able to transfer immediately.

[dragoncar]

Correct. Just use the "Transfer" tab and select to transfer shares from your individual brokerage account to a joint account in both your and your wife's name. Then your wife will be able to log in and transfer shares from the joint account to her individual account. There are holds so you can't transfer recently purchased shares until they settle (3 days for ETFs I think), but as long as you're not buying/selling you should be able to transfer immediately.

Ok that’s perfect — thanks for letting me know!

[EricEng]

Correct. Just use the "Transfer" tab and select to transfer shares from your individual brokerage account to a joint account in both your and your wife's name. Then your wife will be able to log in and transfer shares from the joint account to her individual account. There are holds so you can't transfer recently purchased shares until they settle (3 days for ETFs I think), but as long as you're not buying/selling you should be able to transfer immediately.

Ok that’s perfect — thanks for letting me know!

I did this at Ameritrade online as well.  Transferred a gift of stocks from father to me that had high capital gains (I'm in much lower bracket).

[dragoncar]

So far, pretty happy with the xfer from IB to Fidelity.  I submitted the ACATS request on 9/9, and it hit my account on 9/11.  Apparently the transfer of cost basis can take up to 15 days, so hopefully that is also completed but it's not the end of the world to enter it manually.  Not sure if I should wait for that to update before taking the next step (xfer to joint account).

[terran]

So far, pretty happy with the xfer from IB to Fidelity.  I submitted the ACATS request on 9/9, and it hit my account on 9/11.  Apparently the transfer of cost basis can take up to 15 days, so hopefully that is also completed but it's not the end of the world to enter it manually.  Not sure if I should wait for that to update before taking the next step (xfer to joint account).

Personally, I would wait. I can tell you cost basis transfers fine between Fidelity accounts (even that take a few days to show up though), but I would want to make sure everything had been straightened out with the transfer between brokers before adding another complication to the mix that could make things more confusing if Fidelity and IB need to straighten out any mistakes. I wouldn't want to do anything that they don't usually see that might break their systems.   

[dragoncar]

So far, pretty happy with the xfer from IB to Fidelity.  I submitted the ACATS request on 9/9, and it hit my account on 9/11.  Apparently the transfer of cost basis can take up to 15 days, so hopefully that is also completed but it's not the end of the world to enter it manually.  Not sure if I should wait for that to update before taking the next step (xfer to joint account).

Personally, I would wait. I can tell you cost basis transfers fine between Fidelity accounts (even that take a few days to show up though), but I would want to make sure everything had been straightened out with the transfer between brokers before adding another complication to the mix that could make things more confusing if Fidelity and IB need to straighten out any mistakes. I wouldn't want to do anything that they don't usually see that might break their systems.

Good advice, and the cost basis did update today (9/14).  So far the process is pretty painless, BUT.  It won't let me transfer the shares.  I'm guessing there is some settlement period before I can move them again but I didn't find any information with a quick search.  Eventually I'll ask Fidelity but until then I'm going to...

[MustacheAndaHalf]

@ dragoncar - What if she gives cash equal to the after-tax value of the stock?  That way you're both dealing in after-tax amounts: her after-tax cash for your after-tax stock (you don't actually sell, you just calculate the value).

For a specific example, if you have 100 shares with a cost basis of $50/share, and those shares have gone up to $7,500, you paid $5,000 for shares which are worth $7,500.  The difference, $2500, is what you'd be taxed on if you sold.  So you would take your tax bracket (15% for most people on long-term capital gains), and multiply by the gain ($2500).  So that looks like $375 for this case.

For spousal harmony, I'd also recommend you commit to paying her for any tax-law changes between now and when she sells.  If the tax law moves against her, it would seem retroactively unfair to her.  So if the rates go up to 20% by law, you would kick in an additional 5% of the gain in all the shares you've transferred.

[dragoncar]

@ dragoncar - What if she gives cash equal to the after-tax value of the stock?  That way you're both dealing in after-tax amounts: her after-tax cash for your after-tax stock (you don't actually sell, you just calculate the value).

For a specific example, if you have 100 shares with a cost basis of $50/share, and those shares have gone up to $7,500, you paid $5,000 for shares which are worth $7,500.  The difference, $2500, is what you'd be taxed on if you sold.  So you would take your tax bracket (15% for most people on long-term capital gains), and multiply by the gain ($2500).  So that looks like $375 for this case.

For spousal harmony, I'd also recommend you commit to paying her for any tax-law changes between now and when she sells.  If the tax law moves against her, it would seem retroactively unfair to her.  So if the rates go up to 20% by law, you would kick in an additional 5% of the gain in all the shares you've transferred.

It's a good point, but we don't know what tax bracket we will be in when we sell.  Current plan is just to split the taxes accordingly when she sells.  This will require recordkeeping.  Example using your numbers: Cost basis of $5k, sell to her at $7.5k, she later sells at $12.5k.  So when figuring the taxes, I'd account $2.5k LTCG to me and $5k LTCG to her.  Even if rates up to 30% by then, it's still fair because she would have owed the 30% if she bought it from a third party.  I, on the other hand, would lose out but at least I was able to defer my taxes.  My dream scenario is that we defer long enough that we can take advantage of a 0% rate at some point, although I don't know it that will be politically feasible again.  I don't believe I can predict future rates any more than I can predict stock market movements, but I do know that I'd generally rather pay taxes years from now rather than today.

[terran]

It won't let me transfer the shares.  I'm guessing there is some settlement period before I can move them again but I didn't find any information with a quick search.  Eventually I'll ask Fidelity but until then I'm going to...

My experience has been that ETFs can be transferred b/w our accounts and then sold and new shares purchased immediately. Then I have to wait until the 3rd business day before I can transfer newly purchased shares back to the joint account. I wouldn't be surprised if it's similar for you, so if the transfer was considered "complete" on 9/14, maybe try transferring tomorrow.

One thought you could try if you're only doing this for record keeping purposes and would be fine having the accounts be technically joint is that you could make both accounts joint and just label them for who they "belong" to. I don't know, but that might change the transfer after buy restriction faster.

[dragoncar]

Ok, so it took a while to get the kinks worked out, but now it's a well-oiled share transfer machine.  My notes:

1) Fidelity doesn't let you transfer treasuries online between Fidelity accounts.  Full stop.  Sure, they'll let you ACATS in, but after that you have to call them.  Too much hassle, we just won't transfer those.

2) The reason it wouldn't let me transfer the stocks is supposedly that I had a margin account and the joint account was non-margin.  Frustrating.  You can add margin to an account online, but to remove it... again you gotta call in.  Luckily they handled all this stuff on the same call.  They accidentally closed my account, but they were able to reopen it via secure message.

Gotta decide what to do with the treasuries.  Either I need to have my wife call in to perform the transfer from joint to her personal account, or I have to call in to get it transferred back to my account and I'll just send her stocks from now on.  With stocks, the whole process only takes about a week.

[EricEng]

2) The reason it wouldn't let me transfer the stocks is supposedly that I had a margin account and the joint account was non-margin.  Frustrating.  You can add margin to an account online, but to remove it... again you gotta call in.  Luckily they handled all this stuff on the same call.  They accidentally closed my account, but they were able to reopen it via secure message.

Wow, that's a gotcha I hadn't encountered before.  I don't margin trade, but probably half my accounts have that enabled.  Hadn't ever thought it would create a speedbump.