Helping Clients Realize Benefits From Gifting Stock

It’s graduation season and that, along with Father’s Day next month, represents a fine opportunity for mid-year gift giving.

That seasonality reminds me of my first big graduation gift. High school 1996. My parents gifted me some shares of Pepsico (NASDAQ: PEP) stock. I don’t remember how many. I do remember being boneheaded and ended up needing that money when I was in college for some regrettable reason. Of course, Pepsi has done quite well in the subsequent 28 years since I graduated high school.

Point is, gifting stock, even appreciated shares, is a great idea for both recipient and the gift giver. Think about it. Cash is a popular choice as a graduation gift, whether it be for a high school or college grad. However, if the objective is to help the grad in a financial sense, stock is a far better option than cash because the former has limited return potential. Very limited. Conversely, the sky’s the limit with stock, particularly for graduates who are young and have the benefit of time on their sides.

Point is gifting stock, particularly when unrealized gains are involved, makes a lot of sense, but many clients aren’t aware of the benefits until an advisor helps them see the full picture.

It’s Good to Be the Giver

Understandably, it might be difficult for a client to consider parting with stock and that might be amplified when unrealized gains are involved, but there plenty of benefits included with this form of gifting, including some tax perks.

“Not only could you avoid capital gains taxes, but you could also remove potential appreciation from your estate, which is important if you're worried about estate taxes,” notes Susan Hirshman, director of wealth management for Schwab Wealth Advisory and the Schwab Center for Financial Research.

Regarding high-net-worth clients, advisors should remember to tell those that gift in excess of $18,000 in stock in a given year, the difference will count against the $13.6 million lifetime gift exemption. There are some tax considerations advisors should articulate to clients as well.

“The kiddie tax applies to full-time students under the age of 24 (at the end of the calendar year) who don't have enough earned income to cover at least 50% of their own living and education expenses. In those cases, unearned income (such as dividends or interest payments from the gifted assets) that exceeds $2,600 in 2024 is subject to their parents' income tax rate,” adds Schwab.

Benefits for the Grad

It’s always good to be the recipient of gifts and it’s even better when that present has the potential to appreciate in value. That situation is amplified when gifting in stock.

For the giver, it’s an opportunity to educate the grad about the value of long-term investing and the tax consequences of selling too quickly. These are especially important points for recent grads that didn’t major in a finance-related discipline.

“The recipient will inherit the giver's original cost basis and holding period, so if the stock has significant gains, the recipient will be on the hook for the accompanying taxes should they choose to sell,” adds Hirshman.

Related: Advisors Should Start Long-Term Care Conversations