Stockton pays $10,000 for 1,000 shares of Megacron, Inc., common stock on the day his niece Chama is born. Stockton’s plan is to give the stock to Chama when she is ready to go to college. Eighteen years later, Chama is ready to leave for Eastern Private University. She needs the money for tuition. However, the market value of the stock is $6,500. Stockton’s marginal tax rate is 28%. Chama’s marginal tax rate is 15%.
a. What alternative course(s) of action does the situation offer?
b. Should Stockton sell the shares and give the proceeds to Chama? Explain.