Q: I have three grandchildren, ages 11, 7 and 2. I purchased 100 shares of AT&T for each of them on different dates and had all the dividends reinvested. The three certificates are in my name, so I am paying the income tax.
I intend to transfer each certificate to the individual grandchild at age 18. Should I not be alive, my will specifies that each certificate, with the reinvested dividends, will go to each grandchild.
AT&T lumps all the dividends together. Is there any way to be sure each certificate goes to its beneficiary with all of its specified dividends included, rather than divided into three equal parts?
A: Yes. You can set up three custodial accounts through AT&T Shareowner Services, at (800) 348-8288.
This would involve giving the certificates to your grandchildren but keeping them in trust until the age of majority (18 in most states). You can be the custodian of the trust, or you can choose to designate your grandchildren's parents as the custodians.
The advantages are:
1. If your grandchildren have few other assets in their names, the taxes due will be much lower or perhaps even absent.
2. If you should die before any of the children turns 18, the assets will not have to go through probate.
3. Each account will be maintained separately.
But there are drawbacks:
1. By relinquishing the shares now, you give up the right to change your mind in the future, should you need the money yourself.
2. You have to calculate the division of the accumulated reinvestment shares -- but just this once.
3. Depending on AT&T's future performance, each child will most likely receive a different amount at 18. Will this cause friction?
4. If you make a gift of the stocks now, your grandchildren will most likely be picking up your cost basis for the shares. When they sell the stock, the capital gains tax will be based on the prices you paid plus the appreciation of the reinvested shares. But stocks that are inherited upon death get a step-up in cost basis to the price on the day of death.
To clarify the other ramifications and explore ways to circumvent some of the potential problems, talk to a lawyer who specializes in wills and estates.