Don’t Gift That Stock Yet – Why Inheriting Might Be Better
Thinking about gifting your stocks to your kids or loved ones? You might want to hit pause. In this video, we break down why inheriting appreciated stock is often a far smarter move from a tax perspective.
When it comes to passing wealth to the next generation, many investors consider gifting appreciated stock during their lifetime. While the intention is generous, gifting stock prematurely can create unexpected tax consequences. In many cases, allowing your heirs to inherit the stock instead can lead to a significantly better outcome — especially from a tax perspective.
Here’s what you need to know before transferring shares.
The Key Difference: Gifting vs. Inheriting Stock
The tax treatment of appreciated stock hinges on the concept of cost basis — the original value of the stock when you acquired it.
Gifted stock: The recipient takes on your original cost basis. If they sell, they may owe capital gains tax on the full appreciation.
Inherited stock: The recipient receives a “step-up” in basis to the fair market value on the date of your death. If they sell shortly after, there may be little or no capital gain.
This example illustrates why timing matters when transferring highly appreciated assets.
When Gifting Might Still Make Sense
There are scenarios where gifting appreciated stock can be a smart move:
Low-Income Beneficiaries: If the person receiving the stock is in the 0% long-term capital gains tax bracket, they might sell the stock with no federal tax owed.
In 2025, this includes:
Single filers with taxable income under $47,025
Married couples filing jointly with taxable income under $94,050
Charitable Giving: Donating appreciated stock to a qualified charity allows you to avoid capital gains tax altogether and potentially deduct the fair market value of the donation.
Other Considerations
Timing of Sale: If your child or heir plans to sell the shares quickly, gifting may trigger a large capital gain — something they might not be prepared for.
Holding Period Requirements: Gifting doesn’t reset the holding period. If owner of the stock purchase the stock more than 12 months ago, if it’s gift to someone else and they sell it immediate, they receive long-term capital gain treatment since they get credit for the time the original owner held the securities.
State Taxes: Even if there's no federal capital gain, some states still impose capital gains taxes.
Final Checklist: Before You Gift Stock, Ask:
Has the stock appreciated significantly since I bought it?
Would the recipient likely sell the stock soon after receiving it?
Are they in a low-income tax bracket or facing large expenses?
Am I trying to reduce my estate or make a charitable contribution?
Final Thoughts
Gifting stock during your lifetime can be useful in the right situations — particularly for charitable intent or strategic gifting. But in many cases, letting your heirs inherit appreciated stock allows them to avoid a sizable capital gains tax bill.
Before gifting, consider your own goals, the recipient’s financial position, and the long-term tax impact. The best outcomes often come from a well-timed, well-informed plan.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
What is the main difference between gifting and inheriting stock?
When you gift appreciated stock, the recipient assumes your original cost basis, meaning they may owe capital gains tax on all prior appreciation when they sell. In contrast, inherited stock receives a “step-up” in basis to its fair market value at the time of your death, often eliminating or greatly reducing capital gains tax if sold soon after.
When does gifting appreciated stock make sense?
Gifting may be advantageous if the recipient is in the 0% long-term capital gains tax bracket or if the stock is being donated to a qualified charity. In those cases, little to no capital gains tax may apply, and charitable donors may be able to deduct the stock’s fair market value.
How does the cost basis affect capital gains taxes on gifted stock?
The cost basis determines how much of the stock’s value is subject to capital gains tax. When stock is gifted, the recipient keeps the giver’s original basis, so highly appreciated shares can result in significant taxes when sold. Inherited shares, however, get a new basis equal to their current market value.
Are there tax benefits to donating appreciated stock to charity?
Yes. Donating appreciated stock directly to a qualified charity allows you to avoid paying capital gains tax on the appreciation and may provide a charitable deduction equal to the stock’s fair market value. This can be more tax-efficient than selling the stock and donating cash.
Do gifted stocks qualify for long-term capital gains treatment?
Yes, the recipient inherits the donor’s holding period. If the donor owned the stock for more than one year, the recipient can sell immediately and still qualify for long-term capital gains rates.
What should I consider before gifting appreciated stock?
Before gifting, assess how much the stock has appreciated, the recipient’s income level and potential tax bracket, and whether they plan to sell soon. In many cases, allowing heirs to inherit appreciated stock can result in better long-term tax outcomes due to the step-up in basis.
Should I Gift A Stock To My Kids Or Just Let Them Inherit It?
Many of our clients own individual stocks that they either bought a long time ago or inherited from a family member. If they do not need to liquidate the stock in retirement to supplement their income, the question comes up “should I just gift the stock to my kids while I’m still alive or should I just let them inherit it after I pass away?” The right answer is
Many of our clients own individual stocks that they either bought a long time ago or inherited from a family member. If they do not need to liquidate the stock in retirement to supplement their income, the question comes up “should I just gift the stock to my kids while I’m still alive or should I just let them inherit it after I pass away?” The right answer is largely influenced by the amount of appreciation or depreciation in the stock.
Gifting Stock
When you make a non-cash gift such as a stock, house, or even a business, the person receiving the gift assumes your cost basis in the assets. They do not receive a “step-up” in basis at the time the gift is made. Example, I buy XYZ Corp stock in 1995 for $10,000. In 2017, those shares of XYZ are now worth $100,000. If I gift them to my kids, no one owes tax on the gift at the time that the gift is made but my kids carry over my cost basis in the stock. If my kids hold the stock for 10 more years and sell it for $150,000, their basis in the stock is $10,000, and they owe capital gains tax on the $140,000 gain. Thus, creating an adverse tax consequence for my kids.
Inheriting Stock
Instead, let’s say I continue to hold XYZ stock and when I pass away my kids inherited the stock. If I pass away in 10 years and the stock is worth $150,000 then my kids receive a “step-up” in basis which means that their cost basis in the stock is the value of the stock as of the date of my death. They inherit the stock at $150,000 value, sell it the next day, and they owe $0 in taxes due to the step-up in basis upon my death.
In general, if you have assets that have low cost basis it is usually better for your heirs to inherit the assets as opposed to gifting it to them.
The concept is often times reversed for assets that have depreciated in value…..with an important twist. If I purchase XYZ Corp stock in 1995 for $10,000 but in 2017 it’s only worth $5,000, if I sold the stock myself I would capture the realized investment loss and could use it to offset investment gains or reduce my income by $3,000 for the IRS realized loss allowance.
Here is a very important rule......
In most cases, do not gift a depreciated asset to someone else. Why? When you gift an asset that has depreciated in value the carry over basis rules change. For an asset that has depreciated in value, the carry over basis for the person receiving the gift is the higher of the fair market value of the asset or the cost basis of the person making the gift. In other words, the loss evaporates when I gift the asset to someone else and no one gets the tax advantage of using the realized loss for tax purposes. It would be better if I sold the stock, captured the investment loss, and then gifted the cash.
If they inherit the stock that has lost value there is no value to the step-up in basis because the stock has not appreciated in value.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
