Gifts of stock or in your case a mutual fund can be made in lieu of giving cash. The annual gifting limit of $15,000 per person ($30,000 for a joint gift with your spouse) apply, and the value of the mutual fund on the day of the transfer constitutes the amount of the gift.
Gifts in excess of the annual gifting limits will use part of your lifetime gift and estate tax exemption, which is currently $11.7 million per person for federal estate. A gift tax return would be filed to report a single gift in excess of $15,000. To be clear the $15,000/$30,000 limit is per person so you can gift $15,000/$30,000 to each grandchild without any filing requirement.
If the gift is $10,000 or less you will have no tax issue. Contact your mutual fund compay and have them take care of the transfer by opening an account in the name of your grandchild and moving the shares into each grandchild's name.
If the grandchild is under the age of 18 the account would need to be a UGMA account. Again the mutual fund company should be able to take care of the trasnfer for you.
This is a great idea in lieu of selling the funds, paying taxes on any gains and then gifting the proceeeds.
Your grandchild will inherit your basis and holding period so be sure to compute your basis (your cost plus any reinvested distributions) at the time of the gift. Then provide your grandchild and/or parent with your cost basis, purchase dates and value on the date of the gift. This will allow them to properly and easily prepare their tax return when they eventually sell the mutal fund.
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