Learn why gifting stocks can be the gift that keeps on giving
Key takeaways
The gift of time can make a stock transfer even more valuable.
When a person receives a gift of stock, they assume the tax liability on any earnings previously accumulated. On the other hand, they do not have to pay taxes on those profits until they sell the stock.
- For 2023, the maximum gift exclusion is $17,000 per person per year.
As the holiday season goes into full swing, and we’re diligently (and sometimes frantically!) checking off those holiday wish lists, there’s one gifting option that not many people consider: stocks.
Granted, it may not come wrapped in a box with a bow, like the latest tech gizmo or trending luxury item, but it could bring more joy to the recipient’s world than any gift they’ll receive all year. CWA Partner and CPA Toni Lee says that when done correctly, gifting stocks can be the gift that keeps on giving.
“Giving stocks can be a wonderful gift, not only for the recipient but for the giver as well,” says Toni. “Just make sure you are up to speed on the tax implications and gift exclusion limits before you make the transfer.”
For 2023, the maximum gift exclusion is $17,000 per person per year. Meaning you can give up to $17,000 to as many people as you like without making the IRS aware of the gifts or applying to your lifetime gift exemption of $12,920,000 (aka the total amount you can gift in your lifetime.). For 2024, the annual gift exclusion jumps up to $18,000.
The exclusion applies to any gift: stocks, cash, a car (at its fair market value), real estate and more. If your gift(s) to any one person exceeds the $17,000 exclusion limit in a calendar year, you are required to file a Gift Tax Return (Form 709) with the IRS.
The amount of the gift above the $17,000 exclusion is applied to your lifetime federal estate tax exemption of $12,920,000. If you are married, your spouse is also entitled to a $12,920,000 exclusion.
Now that we’ve covered the gift exclusion limits, let’s look at the unique benefits of gifting stocks.
BENEFITS TO THE GIVER
The advantage is simple for the person gifting the stock: any tax liability on gains already accumulated on the stock is passed on to the recipient.
For example, you invested $8,000 in a company’s stock that, after a few years, is now worth $16,000. If you sold the stock, you would owe capital gains on the $8,000 earned above the principal investment. If you gift it, however, the tax liability passes on to the recipient. You carry no tax burden.
BENEFITS TO THE RECIPIENT
Receiving an asset of significant monetary value is a great thing in and among itself. According to Toni, however, it’s the gift of time that makes the stock transfer even more valuable.
“When a person receives a gift of stocks, they assume the tax liability on any earnings previously accumulated on the stock,” says Toni. “On the other hand, they do not have to pay taxes on those profits until they sell the stock.”
The ability to defer the tax liability means that the total value of the stock gift stays invested over time, allowing the money to compound at its greatest opportunity.
“It’s the power of compounding interest at work,” added Toni. “Yes, the recipient will pay taxes down the road, but the total value of the investment will be much higher than if they had to sell some shares to pay taxes right away.”
Even if the recipient plans to sell the stock right away, there can still be tax advantages. For example, mom and dad each gift $17,000 worth of legacy stock shares to an adult child to help them pay college expenses. When the student sells the stock, he or she must pay taxes on the earnings—but at a college kid’s 10% tax rate rather than the parent’s 20% or higher rate.
GIFTING FOR A COLLEGE FUND
Parents and grandparents often open 529 accounts for their young children to pay for college down the road.
While the $17,000 exclusion applies to college savings funds, there is a loophole that allows donors to “jumpstart” a 529 plan. Each parent or grandparent can give up to five times the annual gift exclusion at one time to fund the account, but they cannot contribute again for four more years.
GIFTING TO A MINOR
Gifting stocks (or cash, for that matter) to a minor isn’t as simple as gifting to an adult. There are many questions to navigate. Are you gifting stocks to fund college down the road? Will this be a one-time gift, or will you be repeating the gift every year? Do you want the minor to have access to the funds when they are 18?
“The gift giver ultimately has to determine why they are gifting,” says Toni. “If they set up a custodial brokerage account to house the stock, the kid will have access to it when they turn 18. Do you want that?”
If not, Toni suggests looking into creating a trust, where the money is systematically disbursed based on the rules set forth in the trust. There are disadvantages of trusts as well. They can be complicated to set up and navigate. Trusts are also an entity, meaning they require the trustee to file a separate tax return.
“Before gifting stock or cash to a minor, I suggest two things,” says Toni. “One, identify why you are gifting, then list the pros and cons. Two, consult a trusted CPA or financial advisor to make sure the gift is executed with your wishes in mind in to protect both the money and the recipient.”
To sum up, giving a stock gift is a great way to reap some of the above tax advantages while sharing your legacy with loved ones.
“Just don’t go it alone,” says Toni. “Talk to an advisor to understand the entire process and tax implications before putting that stock under the tree.”
For more insight into the rules around gifting or to explore further into the prospect of legacy planning, talk to CWA. Set up your free consultation today.
