Should You Gift Stocks as Part of Your Estate Plan?

There are a number of ways to gift stock to family members, during your lifetime or after you die, according to a recent article from Think Advisor titled “Gifting Stock to Family Members: What You Need to Know.” The idea is simple, but how the gifting is done and what taxes may or may not need to be paid (and by whom) requires a closer look.

Transfer of stock today is made through an electronic transfer from your account to the investment account of the recipient of the shares. The rules for gifting shares of stocks also apply to ETFs and mutual funds.

Lifetime gifts. Stock gifts can be made in place of giving cash. The annual limit of $15,000 per person or $30,000 for a joint gift with your spouse, applies, and the value of the stock on the day of the transfer constitutes the amount of the gift.

If you gift in excess of the annual limits, this takes a bite out of your lifetime gift and tax exemption, which as of this writing is $11.7 million per person for federal estate taxes. That’s something to keep in mind when deciding on your gifting strategy.

Using a trust . Instead of giving cash to a family member, you could use a trust and transfer your shares into the trust, with the family member as a beneficiary of the trust. The treatment of tax and cost basis issues will depend upon the type of trust used. Your estate planning attorney will be able to help you determine what type of trust to use.

Transfer on death. You can also gift stocks to others through your will, through a transfer on death designation in a brokerage account, through a beneficiary designation in a trust if the securities are held there, or through an inherited IRA. Taxes and cost basis will vary, depending upon your circumstances.

Taxes and gifting stock. There are no taxes and no tax implications at the time stocks are gifted to someone, but there are some issues to know before making the gift.

When stocks are given to a relative, there is no tax impact for the donor or the person receiving the stock, and as long as the value of the stock is within the annual gifting limits, the donor does not have to do anything. If the gift value exceeds the limit, the person has to file a gift tax return.

The recipient of the stock shares doesn’t owe capital gains taxes, until the stocks are sold. At that time, the cost basis and holding period of the person who gifted the shares will need to be known in order to determine the tax liability.

If the stock is transferred at a price below the donor’s cost basis and sold at a loss, the recipient’s cost basis and holding period is determined by the fair market value of the stock on the date of the gift. However, if the price of the shares increases above the donor’s original cost basis, their cost basis and holding period need to be known to calculate the recipient’s capital gain.

Gifting to children or grandchildren. Gifting shares of appreciated stock to children and grandchildren can make sense for the donors, since they are taking the value of the stock out of their estate and transferring it to a child or grandchild in a lower tax bracket. The recipient or their parents could sell the shares and pay a lower capital gains rate, or even no capital gains taxes. However, if the recipient is a current or future college student, or the student’s parent, the gift could reduce eligibility for need-based financial aid. The stock may need to be reported as an asset belonging to the student or the parent, increasing their income when they are received and/or when they are sold.

Speak with your estate planning attorney before gifting stock or cash to family members. There will be sensible ways to be generous without creating any issues for recipients.

Reference: Think Advisor (Jan. 25, 2021) “Gifting Stock to Family Members: What You Need to Know”