Gifting stock to family members may lack the pizzazz of leaving a luxury car adorned with a bow in the driveway, but it’s a gift that can add value to their lives long after most other gifts have been forgotten.
Gifting stock to family members can be a key part of your clients’ estate planning and can take a number of forms, both during your clients’ lifetime and upon their death. Here’s a look at some considerations when contemplating gifts of stock to family members.
How to Gift Stock
There are a number of methods for your clients to gift shares of stock. The gift would typically be made with an electronic transfer from your client’s account to the account of the recipient of the shares.
In general, the rules for gifting shares of stock discussed here will also apply to gifting ETFs and mutual funds.
Gifts of stock can be made in lieu of giving cash. The annual gifting limits of $15,000 per person ($30,000 for a joint gift with your spouse) apply, and the value of the stock on the day of the transfer constitutes the amount of the gift.
Gifts in excess of the annual gifting limits will eat away at your clients’ lifetime gift and estate tax exemption, which is currently $11.7 million per person for federal estate taxes.
Instead of giving the money to a family member outright, your client might consider using a trust to transfer shares to family members. Depending upon the type of trust used, the treatment of tax and cost basis issues will vary.
Transferring Upon Death
Stocks can be gifted to family members upon the client’s death.
If they are held in a taxable brokerage account, this can be accomplished via the client’s will, a transfer on death designation in a brokerage account, via a beneficiary designation in a trust if the securities are held there, or via an inherited IRA, among other methods.
Again, issues such as taxes and cost basis will vary based on the circumstances.
Tax Implications of Gifting Stock
At the time the stock is gifted to a family member, there are no tax implications. However, there are some points for your clients to keep in mind.
When gifting stock to a relative, there is no tax impact for the donor or the relative receiving the shares. If the value of the gift is within the annual gifting limits, there is nothing for the donor to file.
If the gift exceeds that amount, they would have to file an estate and gift tax return, but again, there would be no tax implications unless the gift exceeded their lifetime gift and estate tax exemption.
There are potential tax implications for the family member who receives the shares. Travis Gatzemeier, CFP, of Kinetix Financial Planning in Flower Mound, Texas, says: “The recipient of the stock doesn’t owe any capital gains taxes until the shares are sold. Any tax liability regarding capital gains is determined by the cost basis and holding period of the person who gifted the shares.”
He adds: “If the stock is gifted at a price below the donor’s cost basis and sold at a loss, the recipient’s cost basis and holding period are determined by the fair market value on the date of the gift. If the price of the shares increases to a level beyond the donor’s original cost basis, then their cost basis and holding period come back into play in calculating the recipient’s capital gain.
“If the shares are sold at a price above the fair market value on the date of the gift, but below the donor’s original cost basis, there is no gain or loss recognized on the sale by the recipient of the shares,” Gatzemeier says.
Benefits of Gifting Stock
Gifting stock to family members can have a number of benefits, depending upon the circumstances.
Brett Koeppel, CFP and founder of Eudaimonia Wealth in Buffalo, New York, says: “Gifting appreciated stock to a family member instead of simply giving cash can be a win-win for both clients and their family. This allows the client to avoid potential long-term capital gain taxes that they could owe on that position in the future.”
Koeppel adds: “If the family member is in a lower tax bracket and needs to access the funds, they’ll be able to sell the stock with less tax liability. This strategy is particularly effective when giving to parents who may have a lower income, or to adult children who haven’t yet reached their peak earning years.”
For example, clients might consider gifting stocks to their parents who are retired and in a lower tax bracket. This can have several planning implications.
First, if the stock pays dividends, the parents can use the dividend income to augment their other sources of retirement income. If their parents’ income is less than $80,000 jointly for a couple or $40,000 for an individual, then qualified dividends will be taxed at a 0% rate.
If the shares have highly appreciated and your client’s parents sell some or all of the shares, they could potentially pay no capital gains taxes if their income is below these thresholds, or 15% if their income is above these limits but still within the wide band of the tax bracket.
In some cases, if their parents die while still holding some or all of the gifted shares, they may pass these shares back to their children with the benefit of a step-up in basis, effectively wiping out any taxes on prior appreciation.
Gifting Appreciated Stock to Kids, Grandchildren
In general, gifting shares of appreciated stock to children and grandchildren can make a good deal of sense for your clients. As mentioned previously, one potential benefit for your clients may surround gifting low basis, highly appreciated shares to a child or grandchild who is in a lower tax bracket.