Gifting Stock To Family Members

The holidays are quickly approaching and people are starting to think about their gift list. One of the questions that often pops up around this time is about gifting shares of stock to a family member.

Gifting shares of stock can be a great gift. It can help stimulate a young person’s interest in the stock market or a particular company. It can pass on family values, such as the importance of long-term saving and investing. It can be a way of sharing a legacy from a loved one. A gift of stock can add value to lives long after most other gifts are forgotten and long gone.

Additionally, gifting shares that have appreciated in value to a family member, such as a child, grandchild or even parent, can allow you to avoid potential long-term capital gain taxes that you would owe on the sale of that stock in the future. If that family member is in a lower tax bracket than you at the time of sale, they would be able to sell the stock with less tax liability. This tax liability could be zero if their income is below certain thresholds.

Transfer Process

If you hold the shares in a brokerage account and the intended recipient has a brokerage account, the gift shares can be transferred electronically. Today, most paper stock certificates have been phased out, so the idea of handing them a stock certificate is antiquated. Most financial institutions simply require a signed authorization letter, with instructions from the donor detailing the assets to be transferred, including the name of the stock, number of shares, and the name and account number of the recipient. If the recipient does not already have a brokerage account, it is easiest to have them open one at the same financial institution in their name. However, if the recipient already has an account elsewhere, then the shares can usually be transferred electronically to their financial institution once written authorization is provided. The donor will need to contact the receiving institution to get their address and exact written requirements for completing the stock transfer.

Donor and Recipient Tax Considerations

At the time the stock is gifted to your family member, there are no immediate tax implications for the donor or the recipient. Keep in mind the following:

Donor

As long as the value of the gifted stock is within the annual gifting limits, the donor does not have to file a gift tax return. The annual gifting limit is $15,000 per recipient for the 2021 tax year. If you are married, you can give a joint gift of up to $30,000 with your spouse.

Recipient

Gifted shares with a capital gain will be transferred with the gain to the recipient of the shares. When the recipient eventually sells those shares, next year or ten years later, they will be responsible for the tax on that capital gain. The tax liability is determined by the cost basis and the holding period of the donor of the shares.

If the stock is transferred at a price that is below the donor’s cost basis and the recipient sells at a loss, the recipient’s cost basis and holding period are determined by the market value on the date of the gift. But if the price of the shares increases to a level beyond the donor’s original cost basis, then the donor’s 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 market value on the date of the gift, but still below the donor’s original cost basis, there is no gain or loss recognized on the sale by the recipient of the shares

In summary, gifting low-cost basis stocks to family members can have many advantages. Some gifting situations can be complex, so make sure you consult with your financial advisor prior to making any decisions.