Stocks are a unique gift that have the potential to keep on giving over time. They can be given to family members, friends, charities, and others. Gifting stock is easy to do and can have benefits for both the giver and the receiver—though it’s worth noting there can be tax implications for the receiver.
1. Set Up a Custodial Account for Kids
Parents can set up a custodial brokerage account for their kids and transfer stocks, mutual funds, and other assets into it. They can also buy assets directly for the account. When the child reaches a certain age they take ownership of it.
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This can be a great way to get kids interested in their finances and educate them about investing or particular industries.
Teaching kids about short and long term investments by giving them a stock that will grow over time is a great learning opportunity. However, keep in mind that there is a so-called “kiddie tax” imposed by the IRS if a child’s interest and dividend income is more than $2,200.
2. Set up a DRiP
Dividend Reinvestment Plans, or DRiPs, are another option for gifting stocks. These are plans that automatically reinvest dividends from stocks, which allows the stock to grow with compound interest.
3. Gifting to a Spouse
When gifting stocks to a spouse, there are generally no tax implications as long as both people are U.S. citizens. A spouse can either gift a present interest or a future interest in shares, meaning the recipient spouse gets the shares immediately or at a specified date in the future.
According to the IRS, If the recipient spouse is not a U.S. citizen, there is an annual gift tax exclusion of $159,000. Any amount above that would be taxed.
4. Virtual Transfers and Stock Certificates
Anyone can transfer shares of stock to someone else if the receiver has a brokerage account. This type of gifting can be done with basic personal and account information. One can either transfer shares they already own, or buy them in their account and then transfer them. Some brokers also have the option to gift stocks periodically.
Individuals can also buy a stock certificate and gift that to the recipient, but this is expensive and requires more effort for both the giver and receiver. To transfer a physical stock certificate, the owner needs to sign it in the presence of a guarantor, such as their bank or a stock broker.
5. Gifting Stock to Charity
Another option is to give the gift of stocks to a charity, as long as the charity is set up to receive them. This can benefit both the giver and the charity, because the giver doesn’t have to pay capital gains taxes, and as a tax-exempt entity, the charity doesn’t either. The giver may also be able to deduct the amount the stock was worth from their taxes.
For givers who don’t know which charity to give to, one option is a donor-advised fund. While the giver can take a tax deduction on their gift in the calendar year in which they give it, the fund will distribute the gift to the charities over multiple years.
6. Passing Down Wealth
Gifting stocks to family members can be a better way to transfer wealth than selling them and paying taxes. For 2021, up to $15,000 per year, per person, can be transferred through gifting of cash, stocks, or a combination. This means a couple can gift $30,000 to one individual, free of the gift tax.
If a person wants to transfer stocks upon their death, they have a few options, including:
- Make it part of their will.
- Go through a beneficiary designation in a trust.
- Create an inherited IRA.
- Arrange a transfer on death designation in a brokerage account.
It’s important to look into each option and one’s individual circumstances to figure out the taxes and cost basis for this option.
7. Gifting Through an App
Another option is to find an investing app that has stock gifting features.
8. Gift Cards
It may be surprising to hear, but stocks can be given via gift cards. These may be physical or digital gift cards.
The Benefits of Gifting Stocks
There are several upsides to giving (and receiving) stocks:
- If you’re giving the gift of stocks to kids, it can begin their investing education and provide them with an asset that will grow over time.
- For anyone receiving stock, there’s potential that the value of the gift will grow over time. (Though it must be said, the value could also diminish over time.)
- If the giver already owns stock in the company, they may benefit on their taxes by transferring some or all of that stock to someone else. If a stock has appreciated in value, the owner would normally owe capital gains if they sell it. However, if they gift it, they don’t have to pay the taxes. Those gains do get transferred to the receiver—but depending on their tax bracket, they won’t owe any taxes when they sell. In that case, both the giver and receiver would avoid paying the capital gains.
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Things to Consider When Giving a Stock Gift
Gifting stocks is relatively straightforward, but there are some things to keep in mind. In addition to the $15,000 per year gifting limit and the capital gains tax implications of gifting, timing of gifts is important, and gifting may not always be the best choice.
For instance, when gifting to heirs, it may be better to wait and allow them to inherit stocks rather than gifting them during life. This may reduce or eliminate the capital gains they owe.
Also, there is a lifetime gift exclusion for federal estate taxes, which was $11.58 million in 2020, which can be used to shelter giving that goes over $15,000. However, this is not a great tax option, due to the ways gifts and inherited stocks are taxed.
Generally a better way to give a substantial amount of money to someone is to establish a trust fund.
Tax Implications of Gifting Stocks
There are some tax ramifications of giving stock as a gift.
Capital Gains Tax
There are a few things to be aware of with the capital gains taxes. If the stock is gifted at a lower value than it was originally purchased at, and sold at a loss, the cost basis for the recipient is based on the fair market value of the stock on the date they received it.
However, if the price of the stock increases above the price that the giver originally paid, the capital gains are based on the value of the stock when the giver bought it. In a third scenario, if the stock is sold on the date of the gift at a higher than fair market value, but at a lower value than the giver’s cost basis, no gain or loss needs to be recorded by the recipient.
- Tax implications for giving: When gifting stocks, the giver can avoid paying capital gains tax. can sometimes be a way for the giver and the receiver to avoid paying capital gains taxes.
- Tax implications for receiving: The recipient won’t pay taxes upon receiving the stock. When they sell it, they may be exempt from capital gains taxes if they’re in a lower tax bracket (consider, for example, a minor or retired individual). Otherwise, if they sell at a profit, they should expect to pay capital gains tax. If the annual gifting limit is exceeded, there may be taxes associated with that and the giver will need to file an estate and gift tax return.
Recommended: What Are Capital Gains Taxes?
Gifting stocks is a unique idea that may have benefits for both the giver and the receiver. As you plan for your future, you may decide to build up a portfolio of stocks that you intend to give to your children, parents, or others as you grow older.
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