How to gift stocks and bonds

There are specific steps for investors to follow regarding taxes.

  • By Kayleigh Kulp,
  • U.S. News & World Report
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Being fortunate enough to make financial gifts to loved ones or charities is a blessing, but in the case of stocks, bonds, and securities, there are special considerations investors should make before doing so.

That's because gifting securities can have two negative effects: potentially triggering a gift tax, and paying capital gains taxes, says Steven Jon Kaplan, CEO at True Contrarian Investments, who doesn't recommend gifting "fluctuating assets" at all.

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The annual gift tax exclusion – no matter whether cash, securities, or other assets – is $15,000 per individual and $30,000 to married couples, which means you don't have to claim this when filing your taxes and it doesn't count toward your lifetime gift tax exclusion, says Patrick Di Fazio, director of Wealth Management Consulting Group at 1st Global. If you gift above that amount, you must file IRS form 709 with your taxes that year and it counts against the lifetime gift tax exclusion amount.

Then there's capital gains, the rates of which can be between zero and 23.8%, including net investment income tax, depending on one's income, says Matthew Masterson, wealth advisor at RegentAtlantic Capital in the New York City area.

Understanding these two consequences of gifting securities can help you determine how to do so while keeping as much of their benefit for you or the recipient as possible. Before you get started, experts suggest you ask yourself the following questions:

  • Do you understand the current market value of the asset you own?
  • Is the recipient's tax bracket lower?
  • Are you gifting the securities as part of an inheritance?
  • Is the securities gift going to a charity?

Do you understand the current market value of the asset you own? Knowing this, and what your cost basis is – the original value of the asset adjusted for distributions, commissions paid, stock splits or other adjustments – will amount to your capital gain or loss, says Michelle Soufan, senior client advisor at TFC Financial Management in Boston.

That can help you to decide whether gifting the security will help or hurt your tax burden and whether you should should gift it at death or while you're alive.

Is the recipient's tax bracket lower? If the recipient of the gift is in a lower tax bracket than you, then less capital gains taxes would be due on the sale if you transfer the ownership before selling, essentially netting more gain, Soufan says. But if the asset has a capital loss, the person in the higher tax bracket would most benefit from taking the loss on their tax return, she says, before gifting the cash from the sale.

Are you gifting the securities as part of an inheritance? If you gift an asset upon your death as part of your estate, the recipient would get a step-up or step-down in the cost basis to the fair market value at the time of your death, Soufan says. That means that assets that have appreciated in value would be most favorably gifted at death, while those that have lost value would be less favorable to gift at death because no capital loss is taken, she says.

A step up can significantly decrease the eventual capital gains tax for the recipients, Di Fazio adds.

"While every client situation is different and their goals for making the gift play an important role, it may make sense to wait on transferring the securities to receive the step-up if the client has highly appreciated securities and is nearing the end of his or her life expectancy," Di Fazio says. "When there is a longer time horizon, it may make sense to gift the securities with the least amount of capital appreciation."

Is the securities gift going to a charity? If you sell the asset and then give the cash to charity, the owner is then obligated to pay capital gains upon its entire increase, whereas the charity does not, netting them more, Kaplan says. You also can deduct the securities' fair market value as of the closing price on the date when the asset was transferred from you, up to 30 percent of your adjusted gross income. The income tax deduction immediately applies in the year in which the contribution was made, helping to reduce any applicable alternative minimum tax, Di Fazio says.

When choosing which ones to gift, choose shares you bought at the lowest prices since that will save the most in capital gains, and also that you have owned them at least one year and one day to avoid short-term capital gains taxes and penalties from the IRS, Kaplan says.

Folks who are least 70½ or older can donate up to $100,000 in combined cash and securities out of a non-Roth retirement account. As long as those assets are transferred directly to a charity rather than going first into another account, they qualify toward the annual required minimum distribution and are exempt from taxation, Kaplan says. In this case, there is no required holding period.

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