The Upshot of Gifting Appreciated Stock

With the end of the school year upon us, family and friends are contemplating what to give the high school and college grads in their lives. Cash is a common choice, but those who want to give a more purposeful gift might instead consider shares in a company.

"Stock is a symbolic gift as well as a financial one," says Susan Hirshman, director of wealth management for Schwab Wealth Advisory and the Schwab Center for Financial Research. "It says, 'I think you're mature enough to navigate and enhance your knowledge in the world of investing.' Plus, if you gift them appreciated stock from your own portfolio, you both can potentially benefit."

• For the grad, receiving appreciated stock can be a lesson in financial literacy. "Don't just transfer the shares—explain what you paid for them, how much they're worth today, and why you think the stock could be a good holding," Susan says.

It's also an opportunity to discuss the tax consequences of selling. "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," Susan notes. Fortunately, a young person who is independent is likely to have a low capital gains tax rate—possibly even 0% if their income falls within the lowest bracket (under $47,025 for single filers in 2024) when they sell and if the shares have been held longer than a year cumulatively by the original owner and the recipient.

• For the giver, the advantage can be twofold: "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," Susan explains. However, if the value of the shares exceeds the annual gift tax limit ($18,000 per recipient in 2024), the excess amount will count against your lifetime gift and estate tax exemption ($13.61 million per individual in 2024).

Despite the many benefits of gifting appreciated stock, there are caveats:

• 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.
• Financial aid calculations—which treat up to 20% of the assets owned by a dependent student as available to pay for college—may be affected by the gift. Likewise, up to 20% of their income (such as from the sale of the assets) in excess of $9,410 will be included in the calculations for the 2024–2025 academic year.

"The kiddie tax may not be a concern if the shares don't throw off a lot of income, but financial aid repercussions should definitely be a consideration," Susan says. "A tax advisor can help you think through the most tax-efficient way to gift assets."