How to give stock as a holiday gift
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Stock can be the gift that keeps on giving, appreciating in value well beyond the initial gift amount. And it can still be quite valuable long after a typical birthday or Christmas gift has been thrown out or spent.
“Gifting stocks can be a great way to teach children or grandchildren about saving and investing, or a fun way of creating interest in the stock market, a company, or a particular industry,” says Eva Victor, senior director high net worth wealth planning attorney at Northwestern Mutual.
But giving stock is not quite as easy as placing an order from Amazon, and would-be givers need to pay attention to a few rules so that they stay on the right side of the law.
Giving stock as a gift: How to gift stock to a child
If you’re thinking of giving stock to a child, there a few options for how to do so:
- Purchase stock specifically for a child: You can do that via a custodial account over which you have or another family member has control.
- Give stock from an existing investment account: Contact your broker to help make the transfer electronically or by stock certificate.
- Give stock with an app: Find an online app that allows you to give stock.
In any case, the recipient should have a brokerage account to receive the stock. A minor child should have a custodial account, while an of-age child may have a regular account. While you could transfer the stock as physical certificates, it’s merely a novelty and pricey to do so, too.
Either way, you’ll want to stay under legal thresholds that could cause tax headaches.
You can safely give stock to a child (or to anyone) under the annual gift exclusion, which allows individuals to give up to $16,000 annually (for 2022) or $17,000 (for 2023) to any number of recipients without incurring a gift tax. A married couple filing jointly can give up to double that individual amount annually. To qualify for this year’s exclusion, you need to make the gift before the end of the calendar year. Otherwise, your gift will count toward next year’s exclusion.
It can require time and paperwork to go through a broker, so if you’re looking for a simpler way to gift stock, there are some online apps that can help. One option is Stockpile.
Stockpile allows you to give a gift card for a preset amount (ranging from $1 to $200) redeemable for stocks or ETFs. You can buy fractional shares, so you don’t need the money for a full share. If you’re looking to get started investing, you can also use the app. Users should note that the app charges $4.95 per month for ongoing access.
Tips for gifting stock to family members
To optimize the gift and avoid other potential complications, you should pay attention to the fine print, especially if your gift is particularly large.
Going over the gift exclusion
If you go over your gift exclusion in any given year, you can use your lifetime gift exclusion – worth $12.06 million in 2022 ($12.92 million in 2023) – to shelter the excess giving, says Victor. But using that shelter is less tax-efficient overall, because of how gifts are taxed relative to inherited stock.
“Recipients will carry over the donor’s cost basis for gifts made during the donor’s lifetime, and will then realize and pay capital gains tax upon sale of the stock,” says Victor. “Whereas appreciated stock included in the donor’s gross estate and passed [down] at death will typically receive a step-up in basis, so that capital gain will not be realized on a sale.”
In short, inheriting appreciated stock is more tax-efficient than receiving it as a gift.
Consider a trust
If you’re looking to give a gift of substantial value, you might consider using a trust. The trust structure can help you “postpone the recipient’s access and control beyond the age of majority,” says Victor.
By placing some constraints on the money, the trust may help ensure that the gift ends up being used more judiciously later in life.
If you’re thinking of going this route, you’ll probably want to consult a lawyer who’s experienced in estate planning, since trusts are a complex area of the law.
Make a charitable donation
While you’re in the gift-giving spirit, you may also consider giving stock to a charity and securing a tax write-off for the stock’s fair market value in the process. If you donate appreciated property, you’ll avoid the tax hit on the gains, take a tax deduction and help out someone, too.
“Applicable adjusted gross income limits are 30 percent of adjusted gross income for gifts of stock held for more than one year, with a five-year carryforward for any unused deduction,” says Victor.
Make sure your favorite charity qualifies for tax-deductible contributions and get any donations in by the end of the year to secure a write-off. If you’re not quite sure what you want to fund but want to take advantage of a tax write-off this year, look into donor-advised funds, which can allow you to take a large deduction this year but distribute the funds over a multi-year period.
Giving stock can be a good way to teach younger relatives about business and how to invest. However, be sure that you consider the tax and estate repercussions if you’re making a sizable gift and turn to an advisor if you have questions.