Gifting Shares of Stock, Mutual Funds, or Bonds

It is very common for clients to ask me if they can gift shares of stock or mutual funds or bonds to their loved ones during their lifetimes.

The answer to this question is YES. But there are some implications of gifting stock that you should know about before you actually do it.

The annual gifting exclusion is presently $12,000, but will increase to $13,000 on January 1st, 2009. This means that anyone can gift $12,000 to as many people as they wish without having to pay any taxes or without having to report the gift. If a husband and wife gift jointly, they can give up to $24,000 (or $26,000, after 1/1/2009) to an unlimited number of beneficiaries without paying tax or having to report to the IRS. (In order for this to hold true, the gift should come from a joint account; if one spouse, alone, is gifting more than $12,000, then a gift tax return, Form 709, will have to be filed to show the IRS that the spouses are splitting the gift).

The gift could just as easily be in the form of stock as cash. So, you can presently gift $12,000 in cash, or you can gift $12,000 in stock (for example, you could gift 1000 shares of a $12 stock). A stock transfer can easily be handled by a stock broker or investment advisor. No gift tax is due, nor is any capital gains tax due. The transferee (beneficiary) would retain the same cost basis and holding period in the stock as the transferor, and taxes must only be paid when the stock is sold. For example, if you have a $2 basis (from many years ago) in a stock that is currently worth $12, you can presently gift 1000 shares of that stock. No taxes would be due and nothing would have to be reported to the IRS. When the beneficiary sells the stock, which could be many years in the future, they would pay capital gains tax on the value of the stock over $2,000. The same holds true for shares of mutual funds or bonds.

It should be noted that you can also gift amounts of stock in excess of $12,000 and that only the amount in excess of $12,000 would be taxable. In addition, every individual can give $1 million, gift tax free, during their lives. So even if your gift is currently worth $100,000, you could apply the first $12,000 of the gift to the annual gift tax exclusion, and apply the remaining $88,000 fo the $1 million lifetime gift exclusion.