Thinking of gifting stocks this holiday season? 4 tips from a financial advisor.
If you didn’t finish your holiday shopping during Black Friday, fear not. There’s one practical gift you might already have lying around, and it can help lower your tax bill, too: stocks.
Gifting stock can be a great way to introduce someone to investing and help them build long-term wealth, according to Megan Miller, senior wealth advisor at MAI Capital Management. After all, how many gifts have the potential to increase in value year after year?
While you don’t have to gift wrap stocks like a traditional present, there are a few additional considerations to be aware of. For those looking to give stocks this holiday season, Miller shared four tips to keep in mind.
Reduce overweight positions
What stocks should you give away? Taking a look at how your portfolio is structured is a good place to start when determining this.
The stock market recorded some impressive gains this year — the S&P 500 is up almost 30%. Especially if you’ve bought in on the Magnificent Seven stocks leading the equity market rally, your portfolio might be disproportionately concentrated in a few names. It’s a good idea to assess your asset allocations regularly to see if they’re still aligned with your investing goals, according to T. Rowe Price.
“We see this often where people want to gift shares of an equity position,” Miller said. “It’s a good way to get overweighted positions out of your portfolio.”
If you’re looking to rebalance your portfolio as the end of the year draws closer, gifting highly concentrated positions is one way to do so.
Decrease taxes for both gifter and recipient
As of 2024, the IRS permits gifts up to $18,000 per person each year, tax-free for the gifter. That means after transferring ownership of the shares, you will no longer be on the hook for any capital gains taxes, since you didn’t sell the investment.
The recipient inherit the original cost basis of the stock, meaning that they’ll owe capital gains tax on any gains made from the original position when they sell the shares. However, gifting stock can still be an effective way to reduce the overall tax burden on a position.
“If a grandparent sold the equity shares at their tax bracket, they might be paying a higher tax rate than their 18-year-old college-bound grandson that they’re gifting it to who has little to no income,” Miller said. If the beneficiary has taxable income of $48,350 or less, then they’ll owe 0% in capital gains tax.
Additionally, consider gifting stocks directly to charities instead of writing a check. Transferring the stock directly to the brokerage account of a qualified 501(c)(3) charity ensures that the organization can receive the full value of the gift. The charity can then sell those shares and not pay any taxes on the gains.
“It’s a very effective way to make charitable contributions outside of just writing a check,” Miller said. It’s certainly more tax efficient than selling your stock, paying capital gains tax, and then donating the proceeds to charity. Plus, contributions to an IRS-recognized charity are tax-deductible.
Be aware of account custody rules when giving stocks to children
You might want to pass down some generational wealth to your children or grandchildren, but if they’re under 18, you’ll need to transfer the shares to a custodial account. A parent or grandparent typically creates and supervises a custodial account on behalf of a minor.
Miller tells her clients to exercise caution when it comes to setting up a custodial account. Once the beneficiary reaches the age of majority — which, depending on the state, could be 18, 21, or 25 — they receive unfettered access to the account.
“If you gift a five-year-old the annual gifting limit, it could be a sizable chunk of money by the time they turn 18 or 21,” Miller said. “But we caution around that because we want to make sure that the 21-year-old is responsible enough to have access to that kind of money where they could liquidate the whole account and go to Vegas.”
It might sound extreme, but Miller has seen these circumstances play out. There are other ways of gifting stock to minors that are lower risk, such as a 529 plan, which is used for higher education savings. Unused funds in a 529 can also be rolled over into a Roth IRA. Miller has also seen parents and grandparents open up a trust for their children.
Plan ahead for a smooth transfer
Gifting stock is a pretty straightforward process, but you still need to plan ahead.
The simplest way to transfer ownership of shares of stock is if the gifter and recipient both have open accounts at the same institution — for example, if the grandparents and grandchildren all use Fidelity brokerage accounts. If that’s the case, the gifter just needs to sign a share transfer form to complete the gifting process, according to Miller.
However, if the gifter and recipient use different institutions, the process could take much longer.
This is especially important to keep in mind in the case of charitable donations. Make sure to confirm that your charitable donations have been processed before the end of the year, advised Miller. In order for a gift to be qualified as a tax-deductible charitable contribution for 2024, the stock must be received in the charity’s brokerage account by December 31st. During the holidays, brokerage firms can’t promise transfers for requests submitted after specific deadlines.
