Gifting stocks can be a tax-advantaged strategy for offloading appreciated stocks, as well as a generous way to share your wealth with people and/or charitable organizations you care about. Here is a basic overview of what you need to know when considering stock gifts.
WHY CONSIDER GIFTING STOCKS?
One of the benefits of gifting stocks relates to avoiding capital gains tax; more on that below. But this strategy has some additional benefits that are worth considering. Gifting stocks to your kids, grandkids or other young people could be their first introduction to investing, or give them more experience with managing a portfolio. It could create an opportunity for you to share some financial wisdom and advice with the young investor. If the stock does well and the recipient watches their money grow, your gift could even spark a lifelong interest in investing. Even if they elect to sell the stock, you’ll be giving them an investment they can use to start growing their own wealth.
Alternatively, another option is gifting stocks to charity—in which case your gift will go further than if you sold the stocks, paid capital gains tax and donated the remaining cash. You’ll also be able to claim a full fair market value tax deduction for the donation. It’s a win-win for everyone, and many nonprofits are happy to accept donations of stock.
There are also estate planning considerations regarding stock gifts. Giving them away during life reduces the value of your taxable estate, which could in turn reduce estate taxes. Alternatively, you might elect to pass them to loved ones after your death, giving their new owners the benefit of lower capital gains tax implications than if you had transferred the stocks to them during your life.
TAX CONSEQUENCES OF GIFTING STOCKS
There are several tax implications that you and your recipient should be aware of when considering stock gifts.
- Capital gains tax: Giving away appreciated stocks allows you to avoid the capital gain tax on the growth those stocks earned while you owned them. Here’s an example: Let’s say you want to give $15,000 in stock to a relative when they turn 18. You bought the stock years earlier for $5,000. If you sold it yourself, you’d pay long-term capital gains tax on the $10,000 gain. Instead, the relative who receives the gift assumes the tax burden. Let’s say they keep the stock for a few years and sell it for $18,000. They’ll owe capital gains tax on the full $13,000 in income the stock gained since you originally bought it. However, the current tax code is such that the younger stock owner may not pay any capital gains tax since their level of taxable income likely qualifies them for the 0% capital gains tax rate (taxable income < $44,625 for single filers in 2023).
Another way to avoid the capital gains tax entirely relates to inherited stock that passes to your heirs upon your death. When you bequeath stock to a loved one through your estate, the cost basis of the inherited stock is “stepped up” to reflect it’s value at the time of your death. That means your heir could receive your stock valued at $15,000, sell it right away and not pay any capital gains tax on the $10,000 it earned while you owned it. This exception doesn’t apply to stock transferred through an irrevocable trust, however.
- Gift tax: This type of tax is assessed if you give away assets with a fair market value above the annual gift tax exclusion. In 2023, the gift tax exclusion is $17,000 per person, or $34,000 per married couples. These exclusion amounts are expected to rise to $18,000 and $36,000 respectively for 2024. If you gift assets worth more than the exclusion amount to any one person, there will be a gift tax assessed on the excess gift. However, the IRS allows a large lifetime exclusion amount, so you will not likely need to write a check for the gift tax, but rather reduce this exclusion amount that will eventually be used on your estate tax return upon your death.
- Tax deductions: Gifting stock to a qualified charity allows you to deduct the full fair market value of the stock in the year you give it away. This strategy also effectively eliminates the capital gain tax implications of the stock, since qualified charities do not pay income or capital gain tax.
HOW DOES GIFTING STOCKS WORK?
Before moving forward with gifting stocks that you own, it’s a good idea to check in with your investment advisors about the impact on your portfolio. Their feedback may also be useful in helping you finalize your decisions about which stock to give and any new investments you should consider when rebalancing your portfolio.
Logistically, gifting stocks can be quite simple by transferring stocks from your account to the recipient’s brokerage account. (If they’re a minor, they’ll need a custodial account to hold the stocks.) This is certainly something your Wealth Manager can assist with, as it will require some paperwork.
What about gifting stocks to charity? Nonprofits often share their brokerage account information publicly to make donations easy. Or, you may elect to transfer stocks to a donor-advised fund. With this strategy you can claim an income tax deduction in the year gifted, but can hold the funds in the donor-advised account and distribute them to various charities over time. This is a particularly good strategy to consider if you have an unusually large income tax year due to the sale of a business, large bonuses at work, etc.
Finally, there’s the option to use estate planning to gift stocks upon your death. You get to maintain control of your portfolio throughout your life, then distribute its assets to loved ones so they can take advantage of that capital gains tax break. There are several estate planning strategies that can be used to pass stocks to heirs, so talk to your estate planning advisors for specific guidance.
DOES GIFTING STOCKS MAKE SENSE FOR YOU?
If you are considering stock gifts, Sachetta’s Wealth Managers are in a unique position to help craft a giving strategy that is aligned with your specific goals and objectives. Contact us today with any questions.
As Senior Wealth Manager, Jeffrey R. Aron, CFP®, MSFP manages all aspects of Financial Planning and client services, including the preparation of comprehensive financial plans (retirement, education, cash flow, etc.), insurance and asset allocation recommendations, advanced estate planning strategies and of course, plan implementation.
