Q: When I was a kid, my grandfather gave shares of stock to his grandkids—actual stock certificates. He thought it would help us learn to be better investors. I remember how I loved to look at those colorful and intricately engraved pieces of paper. Is it still possible to give stock certificates today?
A: While I never received stock certificates as a gift, I remember my friend getting some shares in Disney. Their certificates were emblazoned with colorful images of some of the famous Disney characters. Unfortunately, Disney stopped issuing paper stock certificates in 2013. Most other companies have stopped, too.
Today, most shares are held in book entry form (i.e., as an electronic entry in the books of a brokerage firm.) Actual physical certificates are rare. However, there are still a number of companies that are willing to issue paper stock certificates. A good place to start is the website GiveAShare.com. They have a list of companies whose certificates are available for purchase through them and their fees seem reasonable. As far as I can tell, they make their money selling their frames which run anywhere from $40 to $87.
Q: I would like to make gifts of some of my stock--some to charity and some to my adult children. What are the tax implications?
A: When you give stock to someone else, your cost basis transfers with the stock. When you give appreciated stock to a charity and they sell it, they realize the capital gain. However, since they are a tax-exempt organization, they have no tax liability. This is why giving appreciated stock to a charity is a sweet deal for everyone—except the IRS.
When you donate appreciated stock, make sure you have held it for at least one year. When you donate shares you have held for at least one year you can deduct the entire market value of the gift. However, if you donate stock held less than a year, you can only deduct your book value.
Never donate shares that are trading at a loss. You would be better off selling the shares and realizing the loss and then donating the cash to the charity. As a tax-exempt entity, the charity has no use for the loss, but you do. Capital losses can offset capital gains and up to $3,000 of current income and can be carried indefinitely into the future.
When you give appreciated stock to another person, a similar thing occurs. Your basis and your holding period transfer with the shares. Therefore, if you have a long-term capital gain in the stock, the person receiving the shares will have a long-term capital gain, as well. If that person turns around and sells the shares, she will have to pay long-term capital gains taxes.
This is provides an interesting tax planning opportunity. If your adult children are in the 15% marginal tax bracket, their capital gains tax rate is 0%. You can give them appreciated shares and avoid the capital gains tax completely.
The situation is more complicated if you give shares that are trading at a loss. In that case, the person’s cost basis depends on the price of the stock at the time she sells it. There are three possible outcomes.
1. If the stock price goes up and she sells it at a price greater than your original cost basis, her basis in the sale will be your original cost basis.
2. If she sells the stock at a price below the stock’s market value at the time of the gift, her basis is the market price of the stock at the time of the gift.
3. If she sells the stock for a price between your original basis and its market value at the time of the gift, there will be no gain or loss to report.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to email@example.com.