Is your account filled with highly appreciated securities? Do you have children or grandchildren who are going to college? If your answer is “yes” to both questions, gifting highly appreciated securities might be a tax efficient way for you to reduce your taxable estate, while helping to cover the costs of higher education for a loved one.
You should work with your Apella advisor to determine which securities make sense to gift to your child or grandchild. Typically, it would be a security that has appreciated to the point where it would not make sense to sell based on your tax situation. Your advisor will also consider the effects on your global diversification. For example, if you are overweight in international stock, that fund may be a candidate to gift. Once you and your advisor have done the due diligence and picked the right security, you will gift it directly to the student. Be aware though, the annual gift tax exclusion for 2025 is $19,000 ($38,000 for a married couple) per recipient. For sizeable estates, it is important to pay attention to this. Once the security is in the taxable account of the recipient, they can sell it and use the proceeds to pay for their college tuition.
In the year the student sells the security, they will owe capital gains taxes on the transaction. The capital gain tax rates are 0%, 15%, and 20%. The goal here would be that your child or grandchild is in a substantially lower capital gains tax bracket than you. This is generally the case for students, as gifting highly appreciated securities only makes sense if the student that you are trying to assist is in a lower tax bracket than you. If, however, the student is in the same tax bracket, it would not make sense to gift them securities. Your Apella advisor can recommend the proper securities to gift to minimize overall family taxes.
From an estate planning standpoint, this transaction would prove beneficial. As the donor, you can reduce your estate, without paying any capital gains taxes in the year the gift was made while helping your child or grandchild pay their way through college.
Gifting to your children or grandchildren when you are still alive can be fulfilling, instead of letting everything go to your estate. However, there is a significant benefit to leaving a taxable account to your heirs. When you die, your heirs receive securities that have been “stepped up” in basis. Essentially, the cost basis on those securities resets when you die, and the embedded taxable gain is wiped away. This may be something to consider when deciding whether to gift securities or to pass them to heirs at your death. College tuition might be a current cash need, so waiting for a step-up in cost might not be a good option.
Full-time dependent college students who are age 24 and younger may be subject to additional taxes, called the kiddie tax. The first $1,350 of unearned income is tax-free and the next $1,350 of unearned income is taxed at the student’s rate. Any unearned income above this $2,700 threshold is subject to the parents’ marginal tax rate. It’s important to highlight that part-time students and those taking a gap year are exempt from the kiddie tax. Your Apella advisor can help you better understand this tax and whether it will affect the viability of stock gifting.
Another consideration that should be made is that once you give the gift, you lose control of the assets. You should make sure the student is responsible enough to use the money for the right reasons (tuition, in this case).
Gifting highly appreciated securities makes sense if you don’t have enough cash available to gift. The most powerful way to provide college funds is through early planning, by contributing cash to a 529 plan years before the need arises.
Gifting highly appreciated securities can help reduce your estate while helping you put your loved ones through college. Depending on your financial situation and your family’s financial situation, it can be a win-win for everyone involved. Please contact your Apella advisor to determine if this is the right course of action for you.
Sources:
https://www.nerdwallet.com/article/taxes/kiddie-tax?msockid=111eb1a9af28620328a3a492ae67635f
Topic no. 409, Capital gains and losses | Internal Revenue Service
Gift Tax Exclusion 2025: How It Works, Limits, and Who Pays | Kiplinger
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