What You Need To Know About Gifting Appreciated Stocks

Gifting appreciated stocks is an often-overlooked strategy that savvy high-net-worth investors can employ to potentially optimize both their financial legacy and their philanthropic impact. This approach goes beyond conventional cash donations, allowing benefactors to simultaneously leverage the power of the market’s growth and attempt to gain significant tax advantages. 

More specifically, by transferring stock that has increased in value since its purchase you may be able to avoid paying capital gains taxes, reduce your taxable estate, and potentially qualify for a tax deduction based on the full market value of the gift. Additionally, the recipient of your gift stock generally receives a ‘step-up’ in basis, which can minimize their future tax implications as well.

In this article, the wealth managers from Avidian Wealth Solutions will lay out what you need to know about this tax-efficient gifting strategy and advise on how it may be able to benefit you, your heirs, and/or your favorite charities.

What is considered a gift of appreciated stock?

A gift of appreciated stock occurs when an individual transfers ownership of publicly traded securities to another person or entity as a gift. This can be done during the donor’s lifetime, through their will, or via a trust. The value of the gift is based on the fair market value of the stock at the time of transfer, and the recipient assumes ownership of it with the original cost basis of the gifted stock.

Giving stocks as a gift is one of many strategic charitable giving strategies that should be considered while choosing estate planning solutions to plan for the future of your family’s wealth. It opens doors for donors to contribute more to charities than they might manage with cash donations. For those focused on their financial legacy, these gifts and others like it can make up a meaningful part of your estate plan, helping to reduce your estate’s size and potential tax obligations. 

What are the benefits of gifting stocks?

As we enter the boomer wealth transfer, individuals are looking for ways to decrease their taxable estate and sure up their legacy. Gifting appreciated stock can be a powerful tool in achieving those goals. Here’s how:

Tax deductions

When you transfer stock to another person while you are alive, you do not receive any tax benefits. You will ONLY get a tax deduction equal to the securities’ fair market value at the time of the gift, not the cost you originally paid when gifting to a charitable organization. This provision is especially beneficial if the stock has significantly appreciated since you purchased it. 

It’s important to note that for the tax deduction to apply, the securities must have been held for more than one year. If they qualify, donors can deduct up to 30% of their adjusted gross income (AGI) for gifts of appreciated securities to a public charity — or up to 20% to a private foundation. Where donations exceed this limit, the excess can typically be carried forward and used over the next five years, subject to the same percentage limitations.

Potential avoidance of capital gains tax

A benefit of gifting appreciated stock to a person, rather than a charity, is the potential to avoid federal capital gains tax in Texas, which is typically owed when you sell an asset at a profit. If instead of selling the securities, you give them to an individual or charity, neither you nor the recipient is immediately obligated to pay capital gains taxes. 

For investors, this means the transfer of wealth without incurring the cost of selling and realizing the capital gains. For recipients, the stocks can potentially then be sold without the entity having to pay taxes on the gains they’ve accrued. This makes appreciated stock gifts particularly attractive to both parties involved in the transfer, potentially maximizing the impact of the gift and minimizing the tax burden.

Keep in mind that the recipient may have to pay capital gains tax when they sell the gifted stock if they choose to hold on to it, but they can deduct your cost basis in the stock. For example, if you gifted them $10,000 in stocks and it had appreciated to $15,000 by the time of sale, they would only need to pay capital gains on the $5,000.

Reduce your taxable estate

In addition to income tax benefits, gifting appreciated stocks can be a strategic way to reduce the size of your taxable estate. By transferring ownership of these assets to heirs or charities during your lifetime, instead of leaving them through a will or trust, you can effectively lower the overall value of your estate. 

This reduction can be crucial when it comes to minimizing potential estate tax burdens, as estates that exceed a certain threshold are subject to steep taxes. Moreover, beneficiaries may, in many cases, also avoid a substantial federal inheritance tax in Texas through the receipt of these gifts. Since the stocks are no longer part of the estate at the time of death, they are not tallied in the valuation for estate tax purposes, leading to potential savings for both the giver and the recipient.

Make a bigger impact on the causes you care about

When compared to traditional cash donations, gifting appreciated stock is often a more effective way to support the charities you care about. This method allows donors to bypass capital gains taxes that they would incur if they sold the assets themselves and instead leverages the full value of the stock towards philanthropic efforts. 

Furthermore, charities typically don’t pay taxes on the sale of donated stock, which means they receive the full benefit of the donation. This can translate into a larger contribution than if the donation was made with an equivalent amount of cash post-tax. 

Learn more: How do donations affect taxes?

Build generational wealth for your family

As part of an effective estate plan, gifting appreciated stock can be a powerful strategy for creating generational wealth. By transferring ownership of these assets to your loved ones, you can help them build long-term financial stability and security. 

Additionally, gifts made at the time of your death (i.e. by will or trust) provide your heirs with a step-up in basis, which can minimize their future tax implications as well. This can be advantageous for them when it comes to selling these assets down the road, as they would only owe capital gains taxes on any appreciation that occurs after inheriting the stocks. Although you can gift stocks while you are alive, you will only receive tax deductions when gifting to a charity in which case the donee would receive a donor’s basis.

Factors to consider when giving stocks as gifts

While gifting stocks to loved ones can be a smart financial move, it’s important to consider several key factors before moving forward. 

1. Stock Gift Tax implications: As of 2024, you can give up to $18,000 per recipient per year without triggering a gift tax (this amount is known as the annual gift tax exclusion and can change over time). If you’re married, you and your spouse can each give $18,000 to the same person, for a total of $36,000. Stock gifts that exceed this annual amount may require you to file a gift tax return and could potentially reduce your lifetime gift and estate tax exemption.
2. Recipient considerations: Consider the financial literacy and circumstances of the recipient. Gifting appreciated stock is effective, but it also requires the recipient to manage the asset responsibly. Before gifting stocks, you should ensure the recipient understands the implications of owning stock, including potential tax obligations upon selling the stock.
3. Long-term financial goals: Gifting stocks mustn’t impair your financial security. When used strategically, this method of gifting can be a key component in wealth transfer for families, potentially assisting the next generation in building their financial foundation while minimizing taxes. However, if not done properly, it can also cause unintended consequences and financial burdens.

How to gift stock to a loved one or charity

If you’ve considered the factors and have decided to give or buy stock as a gift, there are several steps to take for a smooth transfer.

1. Consult with your financial advisor: Before making any decisions regarding gifting stocks, it’s essential to consult with your financial advisor who can help assess the implications of such a gift on your overall financial plan.
2. Determine the recipient: Decide who you want to give the stock to and make sure they are aware of their responsibilities as a stockholder.
3. Verify transfer requirements: If transferring stocks to an individual, ensure that they have a brokerage account set up to receive the shares. For charities, it’s best to contact them beforehand and confirm their policies for receiving stock donations. If you want to give stock to your kids, you’ll need to decide whether you want to use a custodial account, a Roth IRA, or open a brokerage account in their name.
4. Consider gifting through a donor advised fund (DAF): DAFs allow investors to donate, receive a deduction, invest the assets, and, at a later date, grant the funds out. This strategy would allow you to get the deduction even if you don’t know who to donate to in a given year — as that could take place later down the road.
5. Complete the transfer paperwork: Your financial advisor or brokerage firm will provide you with the necessary forms to complete the stock transfer. These may include a letter of instruction, a stock power form, and an IRS Form 8283 if donating to a charity for tax purposes.
6. Keep records: Make sure to keep accurate records of all documents related to the stock transfer for tax and estate planning purposes.
7. Follow up: After the transfer is complete, follow up with the recipient to ensure they have received the stock and understand any necessary next steps.

With careful consideration and planning, gifting appreciated stock can be a powerful tool for supporting causes you care about while also providing long-term benefits for your loved ones. 

Wondering how gifting stock could complement your financial plan? Let’s talk.

Gifting appreciated stock is a strategic approach that can enhance your philanthropic impact, assist in wealth transfer, and optimize your tax situation. For those contemplating incorporating stock donations into their financial strategy, a conversation with an Avidian Wealth Solutions financial planner can be an invaluable step toward making informed decisions that benefit both your family and your favorite causes.

Our team of multidisciplinary advisors works out of a boutique family office-style environment, which means that no one area of your financial plan will be in a silo, as our entire team is experienced in collaborating to provide you with well-rounded advice in everything from estate planning to charitable giving and beyond.

Contact us today to schedule a consultation at one of our locations in Houston, Austin, Sugar Land, or The Woodlands and learn more about how gifting appreciated stock can fit into your comprehensive financial plan. 

More Helpful Articles by Avidian: 

• What Are The Benefits of Thinking About Retirement Expenses Now?
• How To Keep Property In The Family Forever
• What Are The New FinCEN Requirements?
• What You Need To Know About 529 Accounts for Grandchildren
• How Does an Irrevocable Trust Protect Assets?

---

Please read important disclosures here