Have you made a killing in the stock market and now want to pass down some of your capital gains to your children?
Perhaps you are planning to teach them the value of investing and compound interest by sharing a few of your shares.
Whatever the reason might be, gifting stock can be a great way to help others achieve financial freedom alongside you.
In this article, we explain the pros and cons of using stock as a gift, including a tax deduction, and offer of few ideas on how to transfer ownership of your shares.
After reading this, you will be better informed about how to effectively spread your wealth to your friends and family.
Can I Gift Stocks to My Child?
Yes, gifting stocks to your children can be great to help pass on generational wealth or for teaching them the values of investing.
Not only that, but you can also transfer shares of other financial assets like mutual funds and ETFs as well.
To do so, simply allocate the desired amount of stock you wish to send by contacting your brokerage and asking them to transfer the assets over to another investment account.
In some instances, there may be limitations on how much equity can be transferred to a family member, but these depend on your personal circumstances like the country you live in and the brokerage you trade on.
If you are looking to gift stock to another person, the same rules apply for the most part, but it is always a good idea to speak with a tax advisor before making a decision.
Otherwise, you may up with unexpected costs and pay taxes on a gifted stock you thought was out of your possession.
Can I Create a Brokerage Account for My Child?
One of the easiest ways to get your kids thinking about investing and financial planning is by opening up a custodial brokerage account.
These investment accounts are also known as UTMA or UGMA accounts (in the US), or trust accounts (in Canada), and they allow minors to own securities and other assets under the supervision of a legal custodian such as yourself.
In it, you will be able to transfer your existing shares of stock and other financial assets from your account to the custodial account.
Beyond that, you can also buy stocks directly in the custodial account for them if you prefer to go that route instead.
Eventually, your child will then take control of their very own brokerage account once they are legally considered an adult; typically 18 or 21.
One thing to keep in mind when investing in stocks in the custodial account is that it is not tax-exempt, meaning that once your child’s unearned income reaches a certain level, you may owe capital gains tax at the parent’s tax rate when the stocks are sold or receive dividends.
To remedy this, you may want to consider opening up a Roth IRA (in the US) for your kids or a family member instead, given that they are exempt from capital gains tax.
Pros and Cons of Gifting Appreciated Stock
Next holiday, birthday, or celebration, why not give someone a gift that keeps on giving?
Gifting a stock certificate is a great way to achieve this thoughtful gesture as it tends to compound its value over time, thus improving the wealth of a friend or family member beyond when you pass on the asset.
But before you do, here are a few considerations to stew over before moving your assets.
Pros of Giving Equities
From a tax perspective, gifting stock to a child or another individual is a great way to reduce the impact of taxes on appreciated stock.
By transferring equity over to someone else, rather than selling your shares, you avoid any capital gains taxes that might occur and instead pass those on to the recipient, thus reducing your cost basis.
For someone like your child, these capital gains are likely less impactful because they are in a lower tax bracket already and this will improve their net worth tremendously.
Not only that, but they don’t necessarily have to sell the shares unless they choose to, meaning that their new assets will avoid the capital gains tax for now, and compound even further over time.
Early Financial Education
For someone unfamiliar with or discouraged by investing, gifting stock can be an effective way to teach them the value of investing.
By getting them started at a young age, it is likely that they will develop better financial habits, and accumulate more wealth over their lifetime than they otherwise would have, given that they tend to have a longer time horizon to work with.
Even if it is just a few shares, owning something productive like stocks is one of the best for people to learn about the benefits of allowing your money to work for you.
Probably the most obvious benefit, but gifting equities is one of the best ways to help someone build wealth and ensure a more secure financial future over the long run.
If you plan on gifting your kids stock, the earlier you start the better.
As Warren Buffett once said, “Successful investing takes time, discipline, and patience. No matter how great the talent or effort, some things just take time.”
Cons of Gifting Equities
Nothing is guaranteed in the world of investing.
Though you may have set out with the intention of gifting someone a valuable asset, the reality is that stocks can sometimes lose value quickly.
For a stock to grow into the future, depends on a few key factors including the financial health of the company, its industry characteristics, momentum, luck, and others.
Therefore, the best way to ensure that your gift recipient earns more than they initially receive is by investing in wonderful businesses at a reasonable price.
Or, if you prefer a more diversified option, ETFs are another excellent choice that can be easily gifted as well.
For more information on how to choose wonderful businesses to invest in, check out this article.
One of the biggest downsides to transferring stocks is losing control of the asset.
Once you pass the stock on to someone else, you are essentially giving up your ownership stake for free.
As such, the recipient can do whatever they want with their new equities, meaning that they can sell their shares immediately if they so choose; exceptions apply to children who must wait until they are of legal age to do so.
Initially, your intention may have been to give them these shares so that they could reap the benefits of compound interest, and help them find financial freedom faster over the long run.
However, now that this stock is in their possession, it is ultimately up to them to decide what they should do.
If you are planning on gifting stock, you may want to discuss your intentions with the recipient, including the effects of capital gains taxes and how it can be advantageous to hold stocks for the long fun.
As another idea, you may want to space the gifts out over time so that you can better gauge how they will use the assets.
Whatever you decide, just know that once the stock is gifted, it is no longer in your control.
Transfer Tax Implications
Depending on the amount of the gift, there may be transfer taxes and other fees associated with gifting equities.
The taxation of gifted stocks depends on several factors, including the value of the gift and the relationship between the giver and receiver.
In general, the giver will be required to file a gift tax return and pay taxes if the value of the gift exceeds the annual gift exclusion amount.
On the other hand, a recipient is likely to be taxed when they sell the stock and required to pay capital gains taxes on any increase in value since the date of the gift; the tax rate will depend on the recipient’s taxable income and the length of time they held the stocks.
It is important to keep in mind that the rules and regulations regarding gifting stocks can be complex and may vary by country or jurisdiction.
If you have any questions or concerns regarding how you will be taxed when transferring stocks, it is best to talk to a tax professional or financial advisor to ensure that you understand all of the potential tax implications.
How to Gift Stock
If you are planning to gift stock, here is how to make it happen:
Step 1: Decide on the Number of Shares You’d Like to Transfer
First, you will need to decide how many shares of a certain stock you’d like to gift to your lucky recipient.
Just so you know, there may be some limits on how much stock you can gift to someone due to your tax laws or specific brokerage firm rules.
For example, in some countries, there is something called a gift tax limit which sets a limit on the amount of money or assets you can gift someone in one year without having to pay the gift taxes.
In the United States, the 2023 gift tax limit is $17,000, while in Canada, there is no gift tax whatsoever!
As for brokerage firms, some may have their own limits set or request you to share documents proving the gift is legitimate.
Since this is on a case-by-case basis, it is best to ask a representative of your brokerage to help clarify things for you.
Step 2: Get the Recipient’s Brokerage Account Details
If they don’t have a brokerage account yet, they’ll need to open one to receive your stock gift.
When choosing a brokerage account, there are many choices to consider including the commission fees they charge, the account minimum requirement, research tools, and others.
Since the recipient will likely continue to invest even after you gift stock, they will want to ensure that they have a brokerage account that meets their needs.
Furthermore, it is worthwhile exploring whether or not the brokerage firm will charge a fee on the stock gift itself.
Once these considerations are taken care of and a brokerage account is set up, it is time to retrieve the recipient’s brokerage account details and move on to the next step.
If you are unsure what brokerage to sign up with and what to watch out for, check out this article.
Step 3: Reach Out to Your Brokerage
Give your brokerage a call and let them know you want to gift some stocks.
From there, they will help you out by ensuring that everything is in order and that your shares are good to be transferred.
If you have any questions about the gifting process, including when your stock will be transferred, don’t be afraid to ask.
Oh and one last thing, don’t forget to give them the recipient’s correct brokerage info!
Step 4: Make the Transfer
Once you have completed steps one through three, your brokerage will now take care of the rest and transfer the stocks from your account to your recipient’s account.
It may take a few days to transfer your stocks so it is best to keep track of everything and to make sure that the stock is moved to the correct account.
After that, the equities are officially out of your possession and in the hands of whomever you send them to.
Hopefully, you bid your shares one last farewell, before saying goodbye.
Gifting stock is one of the most thoughtful gifts any investor can ever offer.
Whether it is for your kid, spouse, or friend, passing on equities allows others to realize the benefits of owning stock and helps them learn more about why investing early is so important.
Beyond that, it is also a great way to reduce your exposure to capital gains taxes, as well as find a more meaningful purpose for assets you may no longer wish to hold.
So rather than buying a gift card or gifting cash for Christmas for the twentieth time, why not invite someone special to join you on your journey to financial freedom?