Gifting stocks in 2024: Benefits, methods, and tax implications

Gifting stocks has become an increasingly popular way to share wealth and financial knowledge with loved ones. This practice offers unique advantages over traditional cash gifts, providing recipients with the potential for long-term financial growth. Whether you're considering gifting stocks to family members, friends, or charitable organizations, understanding the process and its implications is crucial.

Stocks can be a more valuable gift than cash, offering the potential for appreciation over time. As Nicole Webb, CFP and senior vice president at Wealth Enhancement Group, explains, "You want to be giving your lowest basis shares to charity since charity does not pay tax, and those shares are the least valuable to you because they have the highest percentage of capital gains".

This strategy not only benefits the recipient but can also provide tax advantages for the gifter. In 2023, individuals can gift up to $17,000 per person without incurring gift tax liability, with this limit increasing to $18,000 in 2024.

Methods of Gifting Stock

There are several ways to gift stocks, each with its own considerations:

Direct Transfer Between Brokerage Accounts: This is the most common method for gifting stocks to friends and family. It involves transferring shares from one brokerage account to another.

Custodial Accounts for Minors: For gifting stocks to children, custodial accounts like UTMAs or UGMAs are popular options. These accounts allow adults to manage investments on behalf of minors until they reach the age of majority.

Charitable Donations: Gifting stocks to charities can be an effective way to support causes while potentially receiving tax benefits.

Stock Gift Cards and Services: Some companies offer gift cards or services that allow recipients to choose their own stocks.

The Process of Gifting Stocks

To gift stocks, you'll typically need to contact your investment custodian and complete the necessary paperwork. Brian Fry, founder and CFP at Safe Landing Financial, notes that the process may vary depending on the brokerage or investment platform.

For example, if you're transferring stock from one Fidelity account to another, you'll need to provide a letter with specific instructions, including the recipient's name, Social Security number, and account number.

Tax Implications of Gifting Stocks

Understanding the tax implications of gifting stocks is crucial for both the giver and the recipient. Here are some key points to consider:

For the Gifter: Gifting stocks allows you to avoid capital gains tax on the appreciated value of the investment, as long as the gift's value remains within the annual gift tax exclusion limit.

For the Recipient: The recipient assumes the original cost basis of the stock, which means they may be subject to capital gains tax when they sell the shares.

Charitable Donations: When gifting stocks to charities, you can potentially deduct the full fair market value of the security from your taxes.

Dennis LaPorte, owner at UHY Advisors MI, Inc., explains, "If I paid $1,000 for this stock and now it's worth $25,000, I will still get a charitable deduction for $25,000".

Benefits of Gifting Stocks

Wealth Building: Gifting stocks to younger generations can help them start building wealth early. Dondrea Owens, CPA and founder of The Creative's CFO, notes, "A lot of parents and grandparents don't necessarily want to buy toys or just give kids money, but they will give them stock because it's a way for them to start building wealth at a very early age".

Financial Education: Stock gifts can serve as a valuable tool for teaching loved ones about money and investing.

Tax Advantages: Gifters can enjoy zero capital gains tax on the appreciated value of the investment, within certain limits.

Charitable Giving: When donating stocks to charities, you can often give more than you would by selling the stock, paying taxes, and then donating the proceeds.

Considerations When Gifting Stocks

Market Volatility: Remember that stock values can fluctuate, potentially affecting the gift's value over time.

Recipient's Financial Situation: Consider the recipient's financial knowledge and ability to manage the gifted stocks.

Tax Implications: Both givers and recipients should be aware of potential tax consequences.

Documentation: Keep accurate records of the gift, including the stock's cost basis and fair market value at the time of gifting.

Alternatives to Gifting Stocks

While gifting stocks can be an excellent financial strategy, there are alternatives to consider:

Custodial Accounts: These allow you to manage investments for minors until they reach adulthood.

Trust Accounts: Trusts offer more control over how and when assets are distributed to beneficiaries.

529 Plans: These education-specific savings plans can be an excellent gift for future college expenses.

Roth IRAs: For working children, contributing to a Roth IRA can jumpstart their retirement savings.

Gifting stocks can be a powerful tool for sharing wealth, educating loved ones about finance, and supporting charitable causes. By understanding the process, tax implications, and various methods available, you can make informed decisions about stock gifting that align with your financial goals and values.

Remember, while gifting stocks can offer numerous benefits, it's essential to consider the recipient's financial situation and ability to manage the gift. As with any financial decision, consulting with a tax professional or financial advisor can help you navigate the complexities of stock gifting and ensure you're making the most of this generous gesture.

Whether you're looking to help a young family member start their investment journey, support a favorite charity, or simply share your financial success with loved ones, gifting stocks can be a meaningful and potentially lucrative way to do so. As you explore this option, keep in mind the annual gift tax limits, the potential for long-term growth, and the unique opportunity to pass on not just wealth, but financial wisdom to the next generation.