Gifts to Minors and 529 College Savings Plans
Many grandparents, other family members, and friends use Uniform Transfers to Minors Act accounts, called UTMAs, or Uniform Gifts to Minors Act accounts, called UGMAs, to gift money, stock, property and other types of assets to minor children in a way that will help them pay for a first home, start a business, cover emergency medical expenses or provide financial security. If you are interested in gifting money to a child but you want the money to be used solely for college education expenses, you may want to contribute to a 529 college savings plan account for the child. Visit our pages on College Funds and Gifts to Minors UTMAs for more information.
Making Gifts to Reduce Estate Taxes
Gifting is a good way to reduce the size of your estate if estate taxes are a concern. For tax purposes, gifts made while you are alive are considered part of your estate, with the exception of property that falls under an exclusion. If you gift more per year than the annual gift exclusion amount, the amount gifted that exceeds the annual exclusion amount is subtracted from your lifetime estate tax exclusion amount. The lifetime federal gift tax exclusion amount in effect for 2010 is $1,000,000. Beginning January 1, 2011, the lifetime federal gift tax exemption amount is $5,000,000, with a top gift tax rate of 35 percent.
You are required to file a gift tax return for giving away more than the annual exclusion amount, but no gift tax is due until you exceed the lifetime gift exclusion amount. Even if tax applies to your gifts, it may be eliminated by the unified credit. Refer to our Marital Deduction page for information on the unified credit.
A husband and wife can each give away the annual gift exclusion amount tax free to any number of donees they wish. Other ways you can give away money or property tax-free include:
1. Gifts to your spouse who is a U.S. citizen;
2. Paying tuition or medical expenses for another person, provided you make payment directly to the educational institution or medical facility; and
3. Donations to qualified charities.
The Benefits of Charitable Giving
People engage in charitable giving for a variety of reasons. Some give regularly to their church or place of worship as part of religious tithing. Others are members of non-profit organizations and make annual tax-deductible membership contributions. Some give periodically when there is a disaster or tragedy and they want to help in a time of need. Others give as part of a tax-savings strategy to reduce their taxable income while some make charitable gifts as part of legacy planning, such as to their college or university.
Whatever your motivation for charitable giving, it's important to ensure you are doing it the best way possible. There are a variety of strategies to make your donations and some may benefit you more than others, as well as benefiting your charity of choice. Visit our Estate Planning page for more information on making charitable gifts as part of your estate plan.
How to Gift Stock to Your Child
There are many reasons to gift stock to your adult children. Perhaps you want to get your son or daughter interested in investing. Maybe you want to help your adult child through some financial difficulties or with a major purchase. You may want to reduce the size of your estate as part of an estate planning strategy to lower your estate taxes and take advantage of your annual gift exclusion amount.
Before you make your benevolent gesture, you should thoroughly research how the gift of stock affects your taxes and those of your child (who is referred to as the donee). If the stock has increased in value since you bought it, you can give it away without paying capital gains taxes. When the donee receives the stock as a gift, he or she does not pay income taxes or gift taxes on the gift. If any gift taxes are owed, they are owed by the donor, the individual that gives the gift.
In 2011 and 2012, the amount the donor can give to any individual without paying federal gift tax is 13,000 dollars USD, known as the annual gift tax exclusion amount. In 2011 and 2012, a married couple can give up to 26,000 dollars USD to any individual without owing any federal gift tax. Individuals interested in reducing the size of their estate for estate tax purposes often gift the maximum amount to the spouses of their adult children as well.
If the child to whom you will be gifting stock is younger than age 14, be aware the kiddie tax may apply to the child’s unearned income (dividends, capital gains, interest, etc.) above a certain amount. Before making any gift that may be taxable, be sure to consult your tax advisor. Also, before making any gift, consult your tax advisor to determine whether you will need to file a gift tax return and for information on gift splitting if you are married.
How to Transfer Stock to Your Child
After you decide you want to gift the stock, you must transfer title to the stock to your son or daughter. There are two ways to do this, depending on how you currently hold title to the stock.
If you have a physical stock certificate, you will need to properly endorse the certificate and sign it over to the donee. All registered owners of the stock must endorse the certificate exactly as their name appears on the certificate. (A stock power form may also be used). The owner’s signature must be guaranteed with a medallion signature stamp which should be available from your investment firm, bank or other financial institution. If your child is a minor, you will need to follow special rules applicable to minors owning stock, such as having the stock held by a custodian. Do NOT sign the stock certificate without assistance from a stockbroker, financial advisor, or banker. It is very important you properly endorse the certificate to ensure the transfer of title is effective. It is easy to make a mistake when signing a stock certificate, so do it in the presence of a professional that can assist you.
If you hold the stock in your brokerage account and do not have a physical stock certificate, you will need to get your adult son or daughter’s brokerage account number, brokerage firm name, and the exact name on their brokerage account. You will need to give this information to your brokerage firm and fill out their form for transferring title to the stock. The brokerage firm can move the stock from your brokerage account to theirs. If your son or daughter does not currently have a brokerage account, they will need to open one so the stock can be transferred. The easiest way to facilitate the transfer is to have their account opened at the same brokerage firm where you hold the stock. If your child is a minor, discuss with your financial advisor how you can open a custodial account to hold the shares for your child.
Share Your Cost Basis in Gifted Stock
When you gift the stock, you should give the donee detailed information regarding your purchase of the stock so they can retain it for their tax records. You should provide them your cost basis for the stock, the date you purchased it, the value of the stock on the date of the gift, and your holding period. If you purchased the shares on multiple dates rather than in a lump sum, you should also provide the donee a record of all of dates of purchase, the number of shares purchased on each date, and your cost basis in the shares. In order to avoid giving the gift of a tax return nightmare, it’s essential you provide the donee all information necessary for his or her tax filings, including copies of any trade confirmations or other supporting documentation.
The donee will owe tax on the difference between the donor’s cost basis and the value of the stock when the donee sells it, including reinvested dividends. Thus, the donee pays the capital gains tax due for appreciation of the stock during the time it was owned by the donor and the donee. For more information on taxes that may be owed by the donee, consult a tax advisor. More information is also available on the IRS website.
Your Gift of Stock is Not Tax Deductible
Also, remember gifting stock to children is not tax deductible. While you may be able to claim a deduction for a gift of stock to a qualified charity as part of a charitable giving strategy in some circumstances, gifts of stock to your children do not qualify for a deduction. For more information on gifting, estate taxes, charitable gifts, and your estate, check out our Estate Tax Books page.