Can I Gift Stock to My Child? Key Considerations

Gifting stock to a child is a common approach for wealth transfer and financial education, providing an early start on investing and financial growth. This process involves specific methods and has various tax implications for both the giver and the recipient. Understanding these considerations helps ensure compliance with regulations and optimizes the benefits of such gifts.

Methods for Gifting Stock

Gifting stock to a minor typically involves establishing a custodial account, as children generally cannot directly own investment accounts. The primary options for these accounts are Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. Both account types enable an adult to transfer assets to a minor without the need for a formal trust. UGMA accounts primarily hold financial assets like cash, stocks, bonds, and mutual funds. UTMA accounts offer more flexibility, allowing for a broader range of assets including real estate, intellectual property, and other tangible property in addition to financial assets.

A designated custodian, typically a parent or guardian, manages the account until the child reaches the age of majority, which varies by state but is commonly between 18 and 21 years old. At this point, the assets and control of the account automatically transfer to the child. While less common for direct stock gifts, a formal trust can be used for more complex scenarios, offering greater control over asset distribution and usage beyond the age of majority. However, trusts involve more intricate setup and ongoing administration.

To initiate a stock transfer, you will need personal details for both the donor and the child, their Social Security numbers, and specific details about the stock, such as the ticker symbol and the exact number of shares. Forms can typically be obtained from your brokerage firm or, for physical certificates, from the stock’s transfer agent.

After completing the necessary forms, the transfer process can begin. For stocks held in a brokerage account, many firms offer online platforms for initiating a gift transfer, or you may submit forms by mail. If the recipient’s account is with a different brokerage, contact their firm for specific instructions. Direct transfer agents handle transfers for stocks held in certificate form.

After submitting the forms, you will receive confirmation of the transfer from the brokerage or transfer agent. Processing time can vary, often taking a few business days to several weeks depending on the institutions involved. Many brokerage platforms allow you to track the status of your transfer online.

Tax Considerations for the Gifter

The annual gift tax exclusion allows an individual to give a certain amount to any number of recipients each year without incurring gift tax or impacting their lifetime exemption. For 2024, this exclusion amount is $18,000 per recipient. For example, a donor can give $18,000 worth of stock to their child and another $18,000 to another individual within the same year.

Gifts exceeding the annual exclusion amount begin to reduce the donor’s lifetime gift tax exemption. For 2024, the lifetime gift and estate tax exemption is $13.61 million per individual. Gift tax generally becomes payable only if a donor’s cumulative taxable gifts over their lifetime exceed this substantial exemption.

Married couples have an additional consideration known as gift splitting. This election allows a married couple to combine their individual annual exclusions, effectively doubling the tax-free gift amount per recipient. For example, in 2024, a married couple can collectively gift up to $36,000 to a single child without affecting either spouse’s lifetime exemption. Both spouses must consent to gift splitting and may need to file a Form 709.

The “carryover basis” rule applies when stock is gifted. The child (recipient) generally assumes the original cost basis of the giver (donor) for that stock. For example, if stock was purchased for $100 and gifted when its value was $500, the child’s basis for capital gains calculation remains $100. This differs from inherited assets, which typically receive a “step-up in basis” to their fair market value at the time of the original owner’s death.

Even if no gift tax is owed, Form 709 may be required. This form must be filed if a gift to any one person exceeds the annual exclusion amount, or if married couples elect to split gifts. Filing Form 709 allows the IRS to track the portion of the lifetime exemption used. The filing deadline for Form 709 is typically April 15 of the year following the gift.

Tax Considerations for the Child

When a child receives gifted stock, they become responsible for any income and capital gains generated by those assets. Dividend income from the gifted stock is considered unearned income for the child and is subject to income tax, which must be reported on the child’s tax return.

If the child later sells the gifted stock, any capital gains realized from the sale are also subject to taxation. The gain is calculated based on the difference between the selling price and the donor’s original cost basis, due to the carryover basis rule. For instance, if the stock was acquired by the donor for $50 and sold by the child for $150, the child’s capital gain would be $100. This gain is taxed at the child’s applicable capital gains rates.

The “Kiddie Tax” is a key consideration for children with unearned income. This tax rule aims to prevent parents from shifting investment income to their children to take advantage of the child’s lower tax bracket. The Kiddie Tax applies to certain unearned income of a child who is under age 18, or under age 24 if a full-time student and not filing a joint return. For 2024, the first $1,300 of a child’s unearned income is generally tax-free.

The next $1,300 of unearned income is taxed at the child’s own tax rate. Any unearned income exceeding $2,600 in 2024 is subject to the parent’s marginal tax rate, which is typically higher than the child’s individual rate. This means substantial unearned income from gifted stock will likely be taxed as if it were the parent’s income.

Reporting for the child’s income and capital gains involves specific tax forms. If the Kiddie Tax applies, Form 8615 must be completed to calculate the tax owed. Capital gains from the sale of stock are reported on Schedule D, filed with the child’s individual income tax return, Form 1040. Parents may also elect to report a child’s interest and dividends on their own return using Form 8814 in specific circumstances.