Arguably, the best gift is one that keeps on giving, right? From this perspective, stocks would make an ideal gift because of their likelihood to appreciate in value over time. But does the law allow gifting stock?
Yes, you can give stocks as a gift. However, there is a procedure to follow and regulations to comply with. Here is an overview of everything you need to know about giving stocks as gifts.
How to Gift a Stock
Gifting someone stocks simply entails transferring the stocks from your account to theirs. The process is simple and quick, but it may vary depending on the nature of your stocks’ holdings.
The simplest method of gifting stocks is through a broker – in this case, the stocks you wish to give as a gift should be held electronically with a brokerage account. The broker will process the transfer according to your preferences with your authorization.
Your authorization will be required in writing, and you will also be required to provide relevant information about the gift’s recipient. Required details include:
- Your name and address
- Your account number
- A description of the stocks you wish to give as a gift (this typically includes the company’s name and the number of shares you want to transfer)
- The recipient’s name and address
- The recipient’s social security number
- The recipient’s account number
The recipient should have a brokerage account that can hold the shares you wish to gift them. It is preferable if the recipient’s brokerage account is registered with your broker as the transfer will be easier and quicker – if not, all three parties (the sender, the recipient, and the brokers) will have to liaise to finalize the transfer.
The process is different (but still simple) when the stocks are held in certificate form as a physical transfer of shares becomes necessary. You will be required to give authorization for the physical transfer of the shares by signing a written agreement in the presence of a guarantor (the broker is usually the guarantor in most cases). Your signature on the agreement will make the certificate non-negotiable and give the go-ahead for transfer.
P.S. You can also buy stocks directly in the recipient’s name if you don’t have yours to give. This also qualifies as a gift, and it eliminates the processes above of transfer of ownership.
Tax Rules & Implications of Giving Stocks as a Gift
All financial (asset) transfers and transactions are subject to taxation, including gifting stocks. There are tax implication for both you the sender and the recipient. As the sender, you stand to benefit by not paying taxes on the stocks’ capital gains – this responsibility is transferred to the stocks’ recipient.
The recipient’s tax liability will depend on three factors:
- The original cost of the stocks (cost basis)
- The stock’s fair market value at the time of transfer
- The period that the stocks have been in your possession
The holding period is especially important as it determines the cost value. Consequently, the resulting tax rates: 12 months is considered short-term, and anything above that is considered long-term (inherited shares are also considered long-term automatically).
Short-Term Basis Scenario
Suppose you want to gift someone X shares that you bought for $10 but are now worth $20. The recipient’s cost basis will remain $10, and they will be charged a capital gains tax on the $10-profit if they decide to sell the shares for a profit.
Long-Term Basis Scenario
Consider the same scenario above, only this time you will have held the stocks for longer than one year (making it a long-term basis) before gifting the recipient. If the share’s value at the time of transfer is $20, the recipient’s cost basis will be $20. The recipient will also be charged accordingly if they sell the shares for a profit.
How about Donating Stocks as a Gift to a Charity?
Donating stocks as a gift to charity is not only philanthropic but also profitable. It will qualify you for substantial tax exceptions (depending on the size of your donation, of
course). The law states that the total fair value of the stocks can be deducted from your yearly taxes (it is capped to up to 50% of your annual gross income). However, the underlying requirement is that the donation must be to a public charity like an orphanage home or religious organization.
Stocks as a Gift with Strings Attached
The recipient of any stocks as a gift are free to do whatever they wish with the shares once the transfer is complete. However, you can still maintain some degree of control over the gifted stocks via two tactics:
1. Setting up a Custodial Account (for minors)
A custodial account will allow you to manage the shares on behalf of the recipient until they come of age. Regulations on how much control you can assert vary from state to state. For example, some states will allow you to defer access time up to the recipient’s 25th birthday while others grant recipients access as early as their 18th birthday.
P.S. under the Uniform Transfer to Minors Act (UTMA), the shares are the sole property of the minor, and your only entitlement as the custodian is an oversight.
2. Establishing a Trust Fund
A trust fund affords more authority and flexibility compared to a custodial account. As the sender, you can give detailed guidelines on how the shares are to be used, including whether or not they should be sold and how any proceeds should benefit the recipient. A trust fund is applicable for minors as well as adults.
Put a Smile on Someone’s Face
Stock is a lucrative gift to give anyone, including your kids, loved ones, and charitable organizations. The gift recipient will benefit from it for a long time, and you will avoid taxation costs and get tax reprieves.
Solicit the services of a competent financial planner to make the transfer flawless, and Bogart Wealth is here to help. We will help you put a smile on the beneficiaries of your stock gift and work out all the kinks to prevent legal complications. Get in touch today to learn more about how we can help!