Updated: November 30, 2023
Whoever coined the term “the gift that keeps on giving” was probably referring to stock. If you or your clients are contemplating giving shares of stock as gifts to friends or loved ones, remember that gifting stock offers benefits for the donor and has unique tax implications. In this article, Investment News sheds some light on gifting stock; what are its benefits, the taxes on it, and whether it’s a good idea or not.
As with most gifts, there is a process of giving them. Stocks are a little different. These can be given from an existing investment portfolio via a brokerage firm. Shares that have a capital gain can easily be transferred along with the gains to the stock recipient.
There’s a catch. The recipient of the stock would have to pay taxes on the capital gains, but only once they sell the stocks. This will include the difference between the original cost basis and the selling price.
Gift-givers can use a broker. These days, you don’t have to get the physical stock certificates to give stocks as gifts. Shares can now be stored as electronic stock certificates in a brokerage account.
By using a broker, you can give stock and transfer partial or total ownership of your stocks of a specific company.
A lot of brokers also provide specific services for transferring stocks as a gift. Should you choose to gift stocks through a broker, they may require written and signed authorization along with explicit instructions as to how the transfer will be completed. Brokers now can provide an online form that will need the following information:
Stock donor’s information
Stock Recipient Information
If shares are transferred within the same brokerage firm, then the process of transferring the shares is simpler and more straightforward. Otherwise, the donor must contact the receiving brokerage firm, bank, or other relevant institution on their procedures for transferred stock ownership. In this case, the receiving institution will usually give the stock donor the address to send their written instruction or electronic transfer instructions.
To give stock and still have the physical stock certificates, you can give them by endorsing the stocks. This is done by signing the stock certificates in the presence of a guarantor, who can be a representative of the bank that holds the stock certificates or your broker.
Check if the stock certificates have a form on the back for the transfer of ownership. Once signed, the shares represented by the stock certificates will become non-negotiable.
Yes, it’s possible to give just one share of stock as a gift. Gifting a single share of stock can be done to spark a child’s interest in investing and the stock market.
You may buy a single share from firms that specialize in this. You can also buy a single share through your broker.
There can be some cases where even a single share of a company has a huge price tag. Should you still be interested in giving that one share of expensive stock, don’t worry, you still have an option. If even that single share is beyond your reach, there are online brokers that can let you buy less than a single share, or fractional shares.
What’s unique about this sort of stock gift is that some firms give you a physical stock certificate that’s mounted on a frame. The brokerage you use to buy that share can charge you a fee, along with costs for framing and shipping the share certificate.
Is gifting stocks taxable? Yes, there are tax implications for both the giver and the recipient. It’s important to consult a tax planner based on your circumstances, since tax laws can be difficult to navigate and change often.
Here are some items to take note of when it comes to taxes on gifting stock:
This tax can also apply to stocks, although the Internal Revenue Code gives some room that can help many people avoid paying it.
As of 2023, the annual gift tax exclusion lets taxpayers give away up to $17,000 worth of gifts per person per year. You may use the lifetime exemption if the stock’s value is more than the annual exemption.
The lifetime exemption is currently pegged at $12.92 million as of 2023, and this higher exemption is expected to keep rising until 2025 until it reverts to half its peak levels. However, you may still be required to file a Form 709 Gift Tax Return Statement should the gift’s value be more than the annual exclusion, even if no gift tax is due to this exemption.
Those who receive your gift of stock may have to pay the capital gains tax on the sale of these stocks later. They may not have to pay taxes on the entire value of the sale. Your recipient can deduct your cost basis in the stock which was passed on to them.
For instance, if you gave $2,000 worth of stocks, your recipient would owe $3,000 in capital gains taxes if they sold it at $5,000. The tax rate would depend on how long they held onto the stock before selling.
This is the time the recipient held the stock. The holding period helps determine if selling the stock at a later date calls for long-term capital gains tax.
When you give stock to a charity, there’s a chance you can deduct the full market value of the stock at the time it was delivered on your income taxes. You may also avoid capital gains tax on any appreciation on the stock.
Different taxes are applied when giving stock while you’re alive as opposed to doing so upon your death. When stock is inherited, the cost basis takes on the fair market value at the time you passed on. When the tax is applied this way, this potentially reduces the capital gains tax your heirs owe.
But do you or your clients really need to be worried about the gift tax? This video explains who should be more concerned.
Yes, minors can accept stock as gifts, but the child cannot directly own the stock. For them to be able to accept stock as a gift, a custodial account must be set up for them.
The parents of the child can refer to the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) for guides on how to set up the necessary custodial accounts.
The custodian, usually a parent or guardian, must handle the account until the minor reaches the age of majority, which varies by state. Despite the account being custodial in nature, the stock gift is irrevocable.
In that case, no. The capital gains tax is only due if you sell an asset for more than you paid (you made a profit) or invested. The gift tax is applicable, though.
Giving stock as a gift can be part of your estate planning strategy. When you give stock, you can reduce the size of your taxable estate, thus reducing the liability for estate taxes.
Furthermore, giving stocks lets you pass assets to your heirs during your lifetime so they can benefit from any appreciation in the stock's value.
A prudent move for estate planning is to consult an estate planning attorney or financial advisor to ensure that gifting stock aligns with your estate planning goals.
Gifting stock offers a few benefits. For one, the recipient of the stock can reap the benefits of having it increase in value over time.
Stocks that have appreciated in value also give benefits to their donors, like being able to avoid taxes entirely on the stock’s earnings.
Unlike gifted stock, inherited stocks do not take the original purchase price into consideration for tax purposes. If you inherit stock, the cost basis is taken from the market value of the stock on the date the donor died. As a result, you can have a lower tax bill.
If you are gifted with stock, the holding period is from when the donor first owned the stock. Should you want to sell the stock, do it immediately to avoid a higher short-term capital gains tax. This is applicable if the donor bought the stock at least a year ago.
In general, financial advisors suggest not to gift highly appreciated stock, especially when the owner is close to death. According to estate planning attorney Richard Behrendt, “If you have some other resources that aren’t appreciated, you’d rather give that. You’re benefitting them (your beneficiaries) more.”
Elderly clients are advised to postpone giving out their stock until they die. By then, it would have gotten a step up in its cost basis. That’s because the cost basis resets the stock’s price to the value at the time of death. This means that the beneficiary can then sell the stock without paying any capital gains tax.
Another point is to give stock that’s declined in value during one’s lifetime, as noted by Jeffrey Levine, CEO and director of financial planning at Blueprint Wealth Alliance. This is due to the double basis rules applied to gifted assets.
The rules help from a capital gains perspective. For instance, a client buys stock for $10 a share and gifts the stock to a non-spouse after it falls to $4. If the recipient sells that stock after it falls further, to $2 a share, there would be a $2 loss; however, if it appreciates to $12 a share, the recipient only pays capital gains tax relative to the original owner’s $10 cost basis (rather than the $4 inherited value).
Clients also may gift appreciated stock to charity, thereby avoiding capital gains tax and getting a charitable deduction (for those who itemize on their tax returns).
For the super-wealthy, gifting stock offers a way to get assets out of one’s estate to avoid estate tax at death. Estate values exceeding $11.4 million for individuals ($22.8 million for married couples) are subject to a 40% federal tax, and potentially an additional state estate tax, depending on the state.
This makes sense for those who own stock they believe will significantly appreciate, such as stock in a start-up, advisers said. Gifting the stock away during life gets any future appreciation out of the estate.
Giving stock as gifts can offer a host of benefits. Apart from the thoughtfulness of giving such a unique gift, this can provide tax benefits to the donor and the recipient in some instances. Such a gift can also potentially grow and preserve generational wealth for yourself or your clients.
For more articles like this one, read and bookmark our opinion pages on tax planning. Hear from experts as they highlight tax issues that every financial advisor should know.
Did you find the concept of gifting stock insightful? Was this article helpful in understanding the tax implications of giving stocks? Let us know in the comments!
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