There are benefits to giving stock as a gift, and this is a particularly good year to place investments under the Christmas tree.
Last year, 65% of Americans said they wanted investments as holiday gifts, according to a survey conducted by MagnifyMoney. Stock recipients could receive even more shares for the same cash amount this year, given that the markets are down. If they hang on to the gift of stock, they could see the overall value of their present rise with the market over time.
“When there is a low or depressed market, giving stock can be advantageous because you are able to transfer a given stock at a price that is lower than it has historically been,” said Emily Irwin, a wealth management executive at Wells Fargo. “This can be advantageous if funding a trust for someone where that stock is going to be held for a longer time period.”
In other words, now you are able to gift more shares of a particular stock for the same price as fewer shares would cost in a more elevated market.
Americans can give gifts of up to $16,000 tax-free under an annual federal gift-tax exclusion.
“You’re able to give more under the annual exclusion than you would otherwise be able to during any other year. That could be an advantage during the market volatility that we’re seeing in making a gift of stock,” Irwin said.
Capital gains transfer
Givers of stock transfer capital gains — the increase in the asset’s value — to the recipient of the stock. So they avoid capital gains taxes, but the recipient will see value shaved off the gift when they sell the stock.
“If you gift stock, it has carryover basis. If I gift it to my child and they decide to sell it, he or she would pay capital gains tax. That’s the negative for the recipient from a financial perspective,” Irwin said. “And it’s negative for the giver if the intention is, ‘I want to give $100 in stock,’ because really, there will be a 20% haircut taken off of it.”
Gifts to charity
When giving stocks to charities, there are advantages to both the donor and recipient. Neither party is responsible for paying capital gains taxes.
“If someone is giving it to a charity, that is a slam dunk in almost all circumstances because the charity, even if there is a built-in gain, does not pay any taxes when it sells stock,” Irwin said. “And the donor, the person giving it, will often get a tax deduction for it.”
Using an app
Certainly, giving stock to young children is a great way to introduce them to investment concepts at a young age, experts say.
“It is a helpful way to start that conversation with your kid and to give them an idea of what stock ownership is all about,” said Matt Schultz, personal finance expert at LendingTree.
Schultz likes to transfer stock using an app, like Stockpile, that helps parents invest on behalf of their kids.
You can also open a brokerage account in which to invest stocks.
“Some people like the physical presence of a stock certificate, but I do tell folks it’s better to get something like a Schwab account with a stock in it,” said Katie Brewer, a Dallas, Texas-based certified financial planner. “After you get the stock certificate, 20 years later when they go to sell it, they’ll have no earthly idea what it was bought for and won’t know how to report it on taxes.”
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