Gifted Stock

Gifted stock is stock given from one person or entity to another person or entity. Gifted stocks do not include equities that were either received from a spouse or those stocks received through an inheritance from a descendent.

Gifted stocks offer some potential tax advantages. Gifting stocks can be legally executed as an income-shifting strategy to experience tax benefits. For tax purposes, the cost of the stock is the original donor's cost upon purchasing the securities. Capital gains taxes will have to be paid based on the original purchase amount, if the value of the stocks exceeds the limits for nontaxable gifts. However, since capital gains taxes are paid based on the applicable tax rate of the receiver, if the original buyer of stocks is in a higher tax bracket, less tax will be paid.

Taking care of the details of this stock gift in advance can also help avoid a situation where those stocks would be among assets that could get tied up in probate, at least in most states.

The exact process involved in transferring stocks to another party as a gift will depend on the specific circumstances, but is typically fairly simple and straightforward. For an immediate transfer of stocks held in a brokerage account, you may simply need to just fill out a form that changes the name on the ownership title for those stocks. If this gift is an estate planning strategy and you want to arrange a transfer that will take effect upon your death, you would complete a transfer on death, or TOD, agreement. The person named as the designated beneficiary in the TOD agreement has no claims or rights to that stock as long as you are alive. Until the time of your death, you continue to be the legal owner of that stock and can sell it, close the account or change the paperwork to name someone else as the beneficiary.

Depending on the policies of your brokerage firm, you may also be able to name an alternate beneficiary. If you own the stocks with another person such as your spouse, the TOD agreement generally would only apply once both owners of the joint account have died.

This TOD process is similar to a payable on death process used with bank accounts. Setting up this arrangement in advance will make it much easier for the intended recipient to take ownership of the stocks quickly upon your death.