Stocks make excellent gifts for two reasons. First, compounding returns can work wonders for those who leave the stocks invested for a long time. Second, stocks are a great way to get others interested in finance and learning to invest. Here's how you can buy and gift stock.
How to gift stock
Can you gift stock?
You are allowed to give stocks that you own to others. You can start the process of gifting a stock online with your broker or by transferring a stock certificate if you hold shares in physical form. You can transfer a single share, multiple shares, or all of your shares to a recipient if they also have a brokerage account.
Can you buy stock for someone else?
Besides gifting stock you already own, another option is to buy a new stock and then transfer ownership of it to someone else. After making the purchase with your broker, you can initiate a transfer to the recipient's account, usually accomplished using a transfer authorization form. If the recipient's account is at a different broker from your own, also get in touch with the receiving institution to see what they require to make the transfer.
To whom can you gift stock?
There's no limit on who can receive stock as a gift. It could be a family member, a friend, or your favorite charity.
Gifting shares of a company to children can be a great way to educate them about finance, saving, and building wealth for the future. For example, a child who likes Marvel, Star Wars, or Frozen might enjoy owning a share of parent company Disney (NYSE:DIS). An avid video gamer could learn much from owning some shares of Nintendo (OTC:NTDOY). Besides benefiting from any future growth of the businesses, owning and reading about individual stocks provides lessons in business and economics.
There is a caveat here, though. Children are not allowed to own financial assets in most states, so you will have to open a custodial account, such as an UTMA or UGMA account.
UTMA and UGMA accounts are managed by the custodian (you or the account manager you designate). They're typically transferred to the beneficiary when they turn 18 or 21. Or, you could open an account in your name or the legal guardian's name for the benefit of the child.
Benefits of gifting stock
- Help get others, including young children, interested in finance and saving.
- Stock is a great long-term gift in lieu of cash if the recipient doesn't have a current need for the money.
- Gifting stock is a tax-efficient way to start transferring wealth to a beneficiary.
- Donating stock to charity could qualify for tax deductions.
Gifting stock to your beneficiaries, rather than selling the stock and gifting cash, could be tax-efficient for both of you. For example, if you own stock with long-term capital gains, the tax owed on earnings in an eventual sale could be as high as 20%. If your beneficiary is in a lower tax bracket, their tax liability (if they sell the stock rather than keeping it invested) would be lower, or they could have zero tax liability if they file their taxes as single and make less than $40,000 a year in taxable income (or less than $80,000 if married filing jointly).
Do you pay taxes on gifted stock?
Any taxes you would normally owe when selling a stock do not apply if you decide to gift it instead. If there are any capital gains on stock you transfer to someone, that capital gain would transfer to the recipient.
Additionally, gifting stock to a charity could come with a tax deduction if you itemize your tax return (rather than take a standard deduction) and if the charity accepts such gifts. You'll want to check with your tax advisor on any limitations to the transfer and how much of a deduction you qualify for and get documentation from the charity that a gift was made that acknowledges the value. Because charities are tax-exempt, gifting stock (versus selling it yourself, paying the tax, and then giving cash) could maximize what you are able to contribute toward their cause.
Limitations of gifting stock
There is a limitation to consider when gifting stock. The IRS requires you to fill out a gift tax return if you gift more than $15,000 per year of cash or property to any recipient. If you are married, each spouse is allowed to gift $15,000 per recipient and up to $30,000 combined to any one individual.
There is no limit to how many individuals you gift to, but bear in mind that $15,000 limit applies to each person to whom you gift stock. Any value gifted over that amount counts against what's called your lifetime gift exclusion, which is $11.7 million per person in 2021. As long as your excess gifts above $15,000 per year don't exceed $11.7 million in your lifetime, you don't have to worry about owing gift taxes.
Generally, there is no tax deduction for gifting cash or stock to individuals like there is when donating to charity.
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How to choose which stocks to gift
When you decide which stock to give, start with those that have the most capital gains if you are also looking to limit your own tax liability down the road. If taxes aren't a concern when picking a stock from your portfolio (or you're planning to buy and then gift), here are a few ideas:
- For kids, choose a company the child likes or uses products from to help get them engaged with finances in a positive way.
- Choose quality companies with good competitive advantages. The last thing you want is to gift your friend or family member something that could be worthless someday.
- Stocks are a powerful way to build wealth over time. Choose companies that have good growth potential in large industries to maximize the value of your gift over time.
Gifting stock — either to a loved one for a special occasion, to a child as a way to build their appreciation for saving and investing, or as part of a tax strategy — can be a better way to help others accomplish their financial goals than giving cash. And, because stocks have the potential to grow, they could be a gift that keeps on giving for a long time.