Stocks are a popular gift for grads and newlyweds. But there are things to consider before transferring ownership of your stocks.
Can you give stocks as a gift? Sure, but giving stocks as a gift can complicate matters.
What You Need to Know Before You Give Stocks as a Gift
You don't need any special paperwork to transfer the physical certificate for stocks (or bonds or mutual funds). However, there are some things you should be aware of before transferring ownership of your stocks. Let's take a look at some of those issues now:
Tip #1: Determine Who Will Pay the Capital Gains Tax
As with any valuable asset (such as gold, artwork, or real estate), when you give valuable property away to someone else, it will typically trigger capital gains tax liability for the person who gave the gift. So, for example, if you bought stock many years ago for $1,000 and it's now worth $10,000 when you give it to your niece as a gift, she will need to pay tax on the $9,000 in gains.
If you want your niece to receive 100 percent of the stock's current value (that is if you don't want her to owe any taxes), there are three basic options:
The first option is simply not to mention anything about stocks or capital gains when talking with your niece. Then, when she eventually cashes in the stock and needs to pay the taxes, she can just write a check from her personal checking account and be done with it.
The second option is for you (the stock owner) to sell the shares before giving them to your niece. You can then give her cash - which she won't need to pay tax on (because the transaction will be considered a "nontaxable gift").
The third option is for you (the stock owner) to sell the shares and then immediately repurchase them (using cash). Then you can gift your niece the new shares - without having her pay any capital gains taxes.
Tip #2: Get a Gift Letter from the New Owners of the Stock
When you give your niece physical stock certificates for 100 shares of Apple (AAPL) stock, it's easy to keep track of those shares. She has 100 shares, and you don't. However, when one person transfers their individual stocks into a joint brokerage account (with their spouse or partner), it becomes more difficult to monitor who currently owns which stocks - especially if they intend on gifting some of those stocks to others in the future. This can result in ownership issues when trying to sell some/all of the stocks later on.
Many people will include a letter with the stock certificates when giving them as a gift to solve this problem. This letter describes who is currently the owner of the stocks, and it also states that you (the stock giver) plan to give some or all of your stocks to your niece in the future.
Each time you add or subtract shares from your joint account with your spouse/partner, update this letter accordingly, so there is no confusion about who owns what.
Tip #3: Get an Estate Planning Attorney Involved If You're Gifting Large Amounts of Money or Stocks
If - and only if - you have enough assets to worry about estate taxes (or potential for lawsuits against your estate), then you should talk with an estate planning attorney about gifting shares of stock to your niece.
The reason is that financial institutions can sometimes inflict large penalties on people who try transferring ownership of valuable assets (such as stocks, real estate, and artwork) without going through the proper legal channels.
Transferring ownership of stocks without going through the proper legal channels can result in financial disaster for anyone who does this. And while some people might be willing to take a small risk by attempting this kind of transfer - especially when they want to give a large sum of money or stock shares to their children or grandchildren - most people would never try something that risky on their own.
But there is one way that you can legally avoid these potential penalties: work with an estate planning attorney to develop a comprehensive plan before you give or sell ownership of any stocks or other valuable assets.
For example, if you already have an IRA account that owns 300 shares of Apple (AAPL) stock, then you could put the 300 AAPL shares into your joint brokerage account with your spouse/partner - but at least 30 days before transferring those 300 AAPL shares to your niece as a gift. This way, there will be no confusion about who currently owns the stocks and whether or not the transfer has been completed between all of the parties involved.
However, this is just one possible solution for gifting large stocks and other assets. We've seen people do all kinds of different things when trying to transfer ownership - and it can be difficult/impossible to keep track of all of the different legal documents you need.
If you ever find yourself in this situation, we highly recommend talking with an estate planning attorney before transferring any valuable assets. The attorney will know exactly how much risk is involved when doing something like this. They should develop a comprehensive plan that helps everyone minimize their risk when transferring millions of dollars or hundreds of thousands (or millions) in stocks.