She Can Transfer Appreciated Stock to a Grandchild’s Custodial Account Without Selling It, but the Built-In Gain Follows the Gift

Handing appreciated stock to a grandchild can avoid an immediate tax bill, but the built-in gain goes with the shares. Before making the transfer, it is worth considering the kiddie tax, possible financial aid consequences, and one option that could eliminate the gain altogether.

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Grandparents who own appreciated stock can give those shares to a grandchild without selling them first. If you own appreciated stock, you can transfer shares to a grandchild’s custodial account without first liquidating them.

No capital gains tax is triggered at the time of the gift. The original cost basis, along with the built-up gain, transfers to the child together with the shares.

How a Custodial Account Holds Gifted Shares

A custodial account is a brokerage account established under a state’s Uniform Transfers to Minors Act (UTMA) or the older Uniform Gifts to Minors Act (UGMA). The child legally owns the assets in the account. An adult custodian manages it until the child reaches the state’s transfer age, at which point the account becomes theirs.

That age depends on the state. Social Security Administration guidance indicates Texas sets the UTMA transfer age at 21 for gifts, while Louisiana sets it at 18. At many brokerages, shares can be transferred between accounts in kind, meaning the securities move directly without being sold first.

Tax Rule That Carries the Gain Over

The governing rule is 26 U.S.C. § 1015(a). When property is received as a gift, its basis “shall be the same as it would be in the hands of the donor.” Basis is the amount originally paid, and it is used later to determine gain. The grandchild inherits that figure.

Under 26 U.S.C. § 1223(2), the child also receives credit for the time the donor held the shares. IRS Publication 550 says the recipient’s holding period begins on the same date the donor’s holding period began. As a result, stock held for many years by the donor is treated as long-term from the child’s first day of ownership.

There is one exception: if the shares are worth less than what was paid on the day of the gift, the child must use that lower market value when calculating a loss under the same section. In that case, part of the donor’s loss is effectively lost when the stock is given away.

Who Benefits and Who Should Avoid It

This strategy tends to work best for people with long-held stock that has appreciated significantly and who want to help a minor grandchild without needing the funds back. It is not a good choice if the goal is to retain control of the money. It is also a poor fit if the grandchild is likely to sell soon and face the kiddie tax.

Steps to Transfer the Shares

1. Confirm that a UTMA or UGMA account exists in the grandchild’s name. If it does not, a parent or other adult can open one and act as custodian.
2. Ask the brokerage for its in-kind transfer form and identify the exact shares being given.
3. Value the gift on the transfer date. For 2026, the annual gift exclusion is $19,000 per recipient. It rises to $20,000 in 2027.
4. Give the custodian your purchase records so the original cost and purchase date are documented.
5. If your total gifts to that grandchild go beyond the annual exclusion, you will generally need to file Form 709. Filing usually does not mean tax is due, because the 2026 lifetime gift and estate tax exclusion is $15 million. Gifts to grandchildren may also bring in generation-skipping transfer tax rules, which have separate exemptions and reporting rules.

Kiddie Tax, Loss of Control and Financial Aid Concerns

When the child sells the stock, the child reports the gain. However, the kiddie tax may apply the gain at the parents’ tax rate. Under 26 U.S.C. § 1(g)(2), the kiddie tax applies to children under 18. It also applies to 18-year-olds and to full-time students who are at least 19 but under 24 if their earned income does not cover more than half of their own support. IRS instructions for 2025 returns apply the tax to children with more than $2,700 of unearned income, including capital gains.

Once the gift is made, it cannot be reclaimed. The grandchild gains full control at the transfer age and may use the money however they choose. College aid is another concern. Custodial accounts are treated as student assets on the federal aid form, and student assets reduce eligibility for need-based financial aid much more than parent assets do.

One alternative is a grandparent-owned 529 plan. Beginning with the 2024 to 2025 award year, money distributed from such a plan no longer counts as student income on the federal application.

Give Now or Let the Shares Pass at Death

Stock inherited at death receives a new basis equal to its fair market value on the date of death under 26 U.S.C. § 1014(a)(1). That erases the gain that accumulated during the owner’s lifetime. Gifted shares do not get that treatment and keep the built-in gain.

Stock is among the most common assets in estates: publicly traded stock appeared on 5,934 of the 7,195 estate tax returns filed in 2024, according to IRS Statistics of Income data.

Before transferring shares, think about whether your grandchild is better off receiving them now, with the gain attached, or later with a fresh basis. If the gain is large and your estate is far below the $15,000,000 exclusion, waiting may reduce the family’s tax bill. If the gain is modest, or the money is needed sooner, giving the shares now allows them to be put to use right away.