I would like to gift a portion of my stock to my daughter. Do I have to sell it first or can I simply gift the actual shares in the amount allowed this year? Also, I want her to hold onto it until she retires or has a real need for the money. Is that possible?
This is an excellent and somewhat complicated question because it deals with several issues: capital gains taxes, gift tax rules and financial control. While I can't go into a lot of detail here, I can give you some general guidelines. At the same time, I recommend that you talk to your financial advisor, tax professional and perhaps even your estate planning attorney about the particulars of your situation before making your gift.
Here are some things to consider.
First, the simplest part of my answer is that you don't have to sell stock to make a gift; you can transfer it directly from one brokerage account to another. You don't mention your daughter's age, but even if she were a minor, you could open a custodial account for her and make the stock transfer.
Keep in mind, however, that this gift would be irrevocable. If she's a minor, she'll have full control over the assets at the termination age (which can differ by state, but usually between 18-21). If she's older and already has a brokerage account, check with your own financial institution on the process for making the transfer to her account.
Next, you have to consider capital gains taxes. Your decision whether to sell the stock and give your daughter the proceeds or transfer the shares to her isn't just about process. An important consideration is how you'd each be impacted by possible capital gains taxes:
- What are the possible tax consequences for you? If the stock has appreciated, by selling and giving the cash to your daughter, you'd realize a gain on the sale and have to pay capital gains taxes (holding the stock for one year or less is short-term; more than a year is long-term). Therefore, in this case it's probably better to give her the stock. On the other hand, if the value of the stock has gone down, it more than likely makes more sense to sell the stock, realize a capital loss for yourself, and then gift the cash to your daughter.
- What are the possible tax consequences for your daughter? When you give stock, the recipient assumes your cost basis as well as your holding period. As an example, let's say you give your daughter $10,000 worth of stock that you purchased 10 years ago for $2,000. Whenever she sells the stock, she will owe long-term capital gains taxes on the profit beyond $2,000.
Another choice is to hold off and bequeath the stock to your daughter in your will (which would have the added benefit of leaving you in control of the money until that time). In that case, the recipient's cost basis is the fair market value at the date of death, which could lower your daughter's tax liability. It's also important to note that inherited stock, regardless of when it was first obtained by the deceased, is always treated as "long-term" property.
Be aware of gift tax rules
Because of high gifting limits, you may not have to worry about gift taxes, but there are rules you need to be aware of regarding reporting. In 2022 an individual can gift up to $16,000 to anybody—and any number of people—without having it count against their lifetime exemption (although you may be required to file a gift tax return).
A married couple who is "sharing" gifts can give up to $32,000 without having it count against their lifetime exemption, but they do have to report the gift. This applies to cash or stock. If the fair market value of the stock you give your daughter is $16,000 or less at the time you give it to her, there's likely no filing required.
If you give her more than $16,000 in a single year, you'll need to report the gift, and it would apply to your lifetime exemption. However, with the current $12.06 million lifetime exemption per person, it's only the extremely wealthy who have to be concerned about actually paying a gift tax.
Set up a trust for more control
I can certainly understand your desire for your daughter to hang on to the stock until she has a specific financial need. However, if you give it to her as a gift, it's hers to use as she pleases. While you can express your wishes to her, the only way to assure control would be to set up a trust that provides guidance on distributions. It's a good idea to consult with an attorney since there are several steps to set up a trust as well as many considerations to make sure that it properly reflects your wishes.
Talk to your daughter—and your tax advisor
To me, the best thing to do would be to have a frank conversation with your daughter about your plan and your wishes, then talk to your financial, tax and estate planning professionals. In fact, if you're comfortable with the idea, why not set up a meeting with your financial advisor and your daughter so that the three of you can discuss the best way to proceed. It could be a great opportunity to enhance your daughter's awareness of the importance of smart money management as well as a way to reassure yourself that your gift will be most effective.
Have a personal finance question? Email us at email@example.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.