Only a few kinds of gifts have the potential to grow in value over time, and one of them is company stocks. If you plan to gift your loved ones this holiday season, offering them stocks you own can be a practical gift that could positively impact the recipients' finances in the long run.
MAI Capital Management's senior wealth advisor, Megan Miller, recently told Business Insider that gifting stocks is a very efficient way to lower annual tax liabilities and even safely introduce a person to the world of investing. She also shared several pointers to follow if you want to make the most out of gifting stocks or donating them to charitable institutions.
Selecting The Stocks To Gift
The first thing that comes to mind around gifting stocks is knowing how to select the company shares you'd like to transfer. Miller believes one should always avoid extremely high capital concentration in a few stocks to hedge market risks. For instance, the S&P 500 soared close to 30% year-to-date on the back of the Magnificent Seven stocks that drove the record rally fuelled by the AI hype.
While an investor who bought shares of these stocks has witnessed strong returns, risking all capital in a few big names instead of diversifying across industries could expose them to portfolio volatility if the prices of these stocks suddenly drop. Magnificent Seven stocks like Microsoft (NASDAQ: MSFT) are experiencing price fluctuations as the company faced several cybersecurity attacks this year amid an ongoing antitrust probe.
Meanwhile, the Nvidia stock (NASDAQ: NVDA), a primary driver of this year's market rally, faces downward pressures as share prices fell over 2.5% on 10th December amid China's antitrust investigation. Meanwhile, Tesla (NASDAQ: TSLA) could be among the most volatile stocks in the group, having recorded immense share price movements since going public over a decade ago.
"We see this often where people want to gift shares of an equity position," Miller said. "It's a good way to get overweighted positions out of your portfolio." Meanwhile, T. Rowe Price urges investors to rebalance their portfolios at certain intervals to ensure that asset allocations remain aligned with investing goals over time.
Gifting Stocks Lowers Taxes For You And Recipient
The Internal Revenue Service won't subject you to taxes for gifting up to $18,000 (£14,093) worth of stocks per person annually. The capital gains tax exemption can be availed on gifting because you transfer ownership of the shares and not sell them. However, the gift recipient will receive shares at the original cost basis of the stock and will owe taxes on profits made from the original position.
Miller highlighted if the gift stock recipient has a taxable annual income of up to $48,350 (£37,856), they will owe 0% in capital gains tax. "If a grandparent sold the equity shares at their tax bracket, they might be paying a higher tax rate than their 18-year-old college-bound grandson that they're gifting it to who has little to no income," she explained.
She also urged those gifting stocks to charities to consider transferring them directly to the institutions rather than writing a check. She explained that a direct stock transfer to the brokerage account of a qualified 501(c)(3) charity ensures that it receives the gift's full value that can be later sold without attracting taxes on the gains.
"It's a very effective way to make charitable contributions outside of just writing a check," the adviser noted, adding that the gifter avoids the hassles of selling stock, paying taxes on gains, and then donating the remainder to charity. Furthermore, contributions to IRS-recognized charities are tax-deductible, lowering annual tax liability for those donating.
Be Mindful Of Account Custody Laws When Gifting To Kids
If you are planning to gift stocks to your children or grandchildren under 18, the transfer must happen to a custodial account, which is created and supervised by parents on behalf of the minor. Miller highlighted that one should be cautious about creating and transferring wealth to a custodial account because the beneficiary receives complete access to the account upon reaching the age of majority, ranging from 18 to 25, depending on the state.
"If you gift a five-year-old the annual gifting limit, it could be a sizable chunk of money by the time they turn 18 or 21," she explained. "But we caution around that because we want to make sure that the 21-year-old is responsible enough to have access to that kind of money where they could liquidate the whole account and go to Vegas."
The wealth manager recalled situations when people had spent wealth uncontrollably upon receiving access to custodial accounts. However, she suggested several other safer ways to transfer wealth to minors, such as a 529 plan to grow assets that can be used for higher education purposes. Funds in a 529 plan can also be rolled into a Roth IRA, which grows your post-tax contributions in stocks and mutual funds to offer tax-free withdrawals in retirement.
Chalk Out A Detailed Transfer Plan
While stock gifting is easy to understand, Miller said stock ownership transfers are the easiest when the gifter and recipients have trading accounts with the same brokerage. For instance, if both parents and their children use Charles Schwab accounts, the gifter only has to sign a share transfer form to transfer stock ownership to their children.
If there are trading accounts from different brokerages, the gifting process could become lengthy. The same goes for charities because stock transfers to these institutions must reach their brokerage accounts by 31st December for you to claim tax deductions on those contributions in the following tax season. Holiday seasons can disrupt settlements or ownership transfers.
Overall, Miller believes that tax benefits and the positive long-term financial impact on recipients of stock gifts are strong reasons for gifters to take the step as early as possible.
