Gifting stocks is something you might consider if you want to help someone else build a portfolio. Or you could gift shares of stock you own to a charitable organization. There are different ways to gift stocks and it’s important to consider how doing so could affect you tax-wise. Depending on how the stocks are gifted, there may also be tax consequences for the person or organization you’re giving the shares to. Consider working with a financial advisor as you make gifting decisions in light of tax rules.
How Gifting Stocks Works
Gifting stocks simply means giving shares to someone else. You can gift stocks that you own or you can buy shares specifically to give away.
Stocks can be gifted to children, other relatives, charitable organizations or anyone else you want to receive them. You may consider gifting stocks in lieu of cash or other assets if you’re hoping to reap some tax benefits. Generally, gifted stocks that have appreciated in value aren’t subject to capital gains tax if they’re gifts. Plus, assuming the recipient is in a lower tax bracket than you, he or she could sell the appreciated stock and pay much less in capital gains taxes than you would have to do.
There are different ways you can gift stocks to someone else, depending on who the recipient is. But the main ways to gift stocks include custodial accounts, transfer-on-death agreement and trusts, though you may need something different when gifting stock to a charity.
Gifting Stocks to Minor Children
If you want to gift stocks to your kids who are under 18, you can do so in several ways.
One way is by setting up a custodial account on their behalf. With a custodial account, you technically own the assets in the account on behalf of a minor child. You can transfer stocks from your brokerage account into a minor child’s custodial account, which is set up at the same brokerage. Alternatively, you also can purchase stock for the custodial account. Once the child turns 18, the assets in the account belong to him or her. This approach lets you maintain control over what happens to the gifted stocks while your child is a minor.
Even if you don’t have a brokerage account, you can also gift stocks to minors. Companies like Stockpile, for example, allow you to gift full and fractional shares to custodial accounts you open online for your kids. If you’d prefer to give physical shares, you can purchase paper stock certificates to gift through Give A Share.
Gifting Stocks to Adult Children or Other Relatives
If you have adult children then you could transfer it directly to their brokerage account. Or, you may decide to leave shares of stock in a trust that your children can receive assets from once you pass away. Alternatively, you may want to grant an early inheritance by gifting. Putting shares in a trust to pass on to your heirs could offer some tax advantages if you’re able to minimize estate and gift taxes.
If you’re considering the trust route, remember that only a revocable trust would give you the option to make changes later. Putting stocks into any kind of irrevocable trust would be a permanent transfer.
A donor-advised fund lets you make a large, tax-deductible contribution to a qualified charity of your choice. With this kind of trust, you can take on the role of an advisor, suggesting individual grants to be made from your donation. These grants can also go to other qualified charities.
You can also use a transfer on death agreement to gift stocks to adult children or other relatives when you die, without having to set up a trust first. This isn’t exactly a will or a trust; instead, it allows you to transfer assets directly to one or more beneficiaries while avoiding the probate process.
Gifting Stocks to Charity
Donating stocks to charity can result in a tax break if you’re able to deduct the donation from your taxable income. How you can donate stocks to charity often depends on the organization and whether they have the capability to accept electronic transfers of stock shares. Your online brokerage may be able to help with advice on the best way to make a donation.
If you’re donating stocks to charity and you plan to claim that on your taxes, make sure you’re documenting the transaction properly. This usually means some kind of written letter detailing who the stocks were gifted to, the value or amount donated and the date of the donation.
A donor-advised fund may be something to consider if you have more than just a few shares of stock you want to give to charity or you want to make ongoing gifts. Donor-advised funds are cheaper to set up and maintain than private foundations for people who want to create a legacy of philanthropic giving while enjoying tax advantages.
Tax Rules for Gifting Stocks
When gifting stocks, it’s important to consider how you might be impacted when it’s time to file taxes. For instance, gifting too much stock to any one person could trigger the gift tax. For 2022, you can gift someone up to $16,000 or up to $32,000 if you’re married and file a joint return without having to file a gift tax return. For 2023 the limits are $17,000 and $34,000, respectively. If you have multiple children, you could gift each of them stocks up to those amounts without paying gift tax.
Gifting stocks that have increased in value wouldn’t require you to pay capital gains tax. That’s why it can be better to gift stocks rather than sell them and give someone the cash. But if someone you gift stocks to turns around and sells them, they may be responsible for paying capital gains tax if the stocks increased in value while they owned them.
In terms of donating stock, you’re generally limited to 50% of your adjusted gross income for a tax deduction. So it’s important to keep that number in mind if you’re hoping to maximize a deduction for charitable donations. Talking to a tax professional can help you determine the best strategy for gifting stocks to a person or organization.
The Bottom Line
Gifting stocks can have advantages for you as the giver and for the person or organization receiving them. Among other things, it is a way to get a head start on transfering your wealth to the next generation. There are different ways to gift stock, and it’s important to remember the tax rules before making a gift. In the case of large gifts, you may also want to talk to your financial advisor about how it could affect your overall financial plan.
Tips for Gifting
- A financial advisor can offer valuable insight and guidance about the best way to gift stocks to your children and how that might fit into your broader estate plan. If you don’t have an advisor yet finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you plan to gift stocks to kids, consider whether you want to give full or fractional shares. Fractional share investing is a way to buy more expensive stocks in small increments. There are a number of online brokerages that allow you to purchase fractional shares in top companies starting with as little as $1 to $10.
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