The tax benefits of gifting stock

The tax benefits of gifting stock

Forget the holiday-themed doll or the hot new tablet computer. Because of the looming “fiscal cliff,” this season is prompting many gift givers to consider a different sort of present for children and teens: the gift of stock.

With the lifetime gift-tax exemption set to decrease to $1 million — from $5.12 million — at the start of the new year as part of the cliff scenario, parents, grandparents and others are looking to take advantage of current rules and make sizable tax-free gifts by Dec. 31.

Combine that deadline with the holiday frenzy and you have a flurry of stock-gift activity, say financial professionals. While no one tracks how many shares of stock are being stuffed into holiday stockings, the pros say the trend is hard to ignore. “We’ve had an elevated number of calls from clients trying to combine giving a gift with navigating the fiscal cliff,” says John Cogswell, chief market strategist at Baystate Wealth Management, a financial advisory firm in Boston.

Further fueling interest: Gift-givers are eyeing a potential change in the capital-gains tax in 2013, says Laurie Hall, an estate-planning attorney with Edwards Wildman Palmer in Boston. That rate is scheduled to climb from 15% to 20% for most investors, and those who hold on to their stocks after the New Year could pay more for the privilege of selling later.

And that isn’t even factoring in a new 3.8% tax on investment income that is part of the health-care legislation known as “Obamacare.” The bottom line, Ms. Hall says, is that it is an opportune time “to give away a ton” of accumulated wealth.

Of course, politicians are continuing to haggle over the details of any tax changes, but financial professionals note that giving away stock is a perennially useful estate planning tool. And in an era of growing concern about the financial literacy of younger Americans, stock ownership can also teach children a lesson about the markets. “There’s no other place to get it but the school of hard knocks,” says Robert Stammers, director of investor education at the CFA Institute, a financial-industry association

While gift-givers may be sparing themselves a capital-gains hit, their recipients aren’t necessarily getting a free ride. A stock’s cost basis is passed along, so if the recipient eventually cashes in an investment that has gone up considerably in value, he could be looking at a tax bill, too. But the capital-gains tax varies depending on an individual’s tax bracket, which could work to a young stockowner’s benefit— if the stockowner sells during a year when he has little or no other income, he could pay less in taxes than he otherwise would.

Another issue for gift-givers to consider: A gift of stock can’t go directly into a tax-advantaged 529 college-savings plan. If a gift-giver really wants to help send a child to college, the better bet may be a cash contribution to a 529.

Gift Certificates

Possible tax changes related to the ‘fiscal cliff’ have prompted many parents and others to give stocks to kids.


Tax advantages: Givers can make tax-free gifts under today’s higher-exemption rates, and avoid possibly a bigger capital-gains hit next year.
Education: Giving stock can help educate children about investments, financial professionals say.

Paying for school: Gifts of stock can’t be made directly into a 529 college-savings plan.
Fear of the unknown: In some cases, givers can’t impose restrictions on how the recipient uses the gift.
Source: MarketWatch/The Wall Street Journal