Give Stocks Instead of Toys This Holiday Season

Benefits of gifting stocks

Toys will eventually be useless. The opposite is true for stocks.

Given that most businesses endure for decades, the stock you give to a five-year-old could still be in their possession at age 25, 50, or even 75.

In addition, the value of that stock may increase multiple times over the years. Thus, while the toy's value will eventually become zero, the $50 stock you purchase today may be worth $500 in 10 or 20 years.

But a completely different dimension is more crucial.

A gift of a single share of stock could set a child on a lifetime path of wealth accumulation. This may be unnoticed when you present the gift.

However, as time passes and the value of the stock increases, the child will realize the power of investing, which can develop an interest in continuing to invest.

In other words, the single stock you give to a young child may be the basis for a lifetime of financial independence. It may also pique the child's curiosity about investing and finance.

After all, they are unlikely to learn about that in school. They can repay their college debt or credit card debt using the money. They can afford a professional credit card consolidation program to eliminate their credit card debts.

Also, parents can avoid considerable debts to fund their children's education.

The child will forget every toy they've ever received. However, that first and subsequent stocks may become a permanent part of their lives.

Know how to give stock as gifts

Giving stock shares can be fun to get people interested in the stock market, a company, or an industry. Stock shares can be gifted to recipients through your account at a brokerage firm.

A single share of stock may also be gifted to a child to teach them about finance, investing, and saving. Gifted shares with a capital gain will be transferred along with the growth to the recipient.

If the shares are sold, the recipient must pay taxes on the capital gains.

Consult a tax professional, as capital gains taxes can differ between short- and long-term holdings.

Transfer certificate of stock

If the stock is held in certificate form, the physical stock will need to be transferred. The stock must be signed by a guarantor, the owner's bank, or a broker. On the back of the certificate may also be a form about the transfer of ownership. After the completion of the certificate, it will become non-negotiable and transferable.

Donate stock via a broker

Typically, there will be no physical copy of the stock; the shares will be electronically held in a brokerage account. The sender might transfer complete or partial ownership of the company's shares. Many brokers offer the opportunity to transfer shares as presents periodically.

What are the tax aspects of giving stock as gifts?

Unfortunately, both the giver and receiver of a gift may be subject to tax consequences. The two taxes you must be aware of are the "gift tax" and the "kiddie tax;" both apply to the child/recipient.

In an exciting twist, the giver is responsible for gift tax, not the recipient.

And this tax can be as high as 40% of the value of the gift!

However, the IRS provides an annual exclusion for relatively modest gifts.

Gift tax

You may give up to $16,000 to an individual in 2022. You and your spouse can give up to $32,000 to the same person. The federal gift tax may apply to gifts exceeding these thresholds. Gifts to minors are not tax deductible for the donor.

Kiddie tax

The child or gift recipient is not subject to the gift tax. However, they or their parents may be liable for tax on the total income generated by the gifted stock.

This can include interest, dividend, and capital gain income. However, if the total investment income is within certain thresholds, there may be a tax advantage. A child's first $1,100 investment income is exempt from taxation. The following $1,100 is taxed at the child's rate of 10%, typically lower than their parents’ rate.

However, if the child's total investment income exceeds $2,200, it should be reported and taxed at the parent's rate.

How to purchase, gift, or give children stocks

You may be familiar with purchasing stock certificates printed on paper to represent stock shares. Nevertheless, actual stock certificates have become scarce. Purchasing stock as a gift, mainly if only one or two shares are involved, may necessitate purchasing a gift card to enable the child to buy stock in a preferred company. There are numerous opportunities for this, which is fortunate.

Donate to a current or mew 529 account

Consider establishing a 529 plan for your child or grandchild. This qualified tuition program (QTP) allows parents and grandparents to open a tax-advantaged account to save for a child's education.

However, if a parent or grandparent has already opened a 529 account for a child, you may still be able to make a gift of stock to that child's account. The dividends paid on the stock will not be subject to taxation within the budget. You can withdraw tax-free money from a 529 plan to pay for qualified education expenses for your child. Individual states sponsor 529s, a restriction that must be considered.

Investing options may be limited to exchange-traded funds (ETFs) provided by the plan. However, you can gift shares in specific 529 ETFs through some providers listed below.

Conclusion

If you are contemplating a custodial account for a child, investigate Roth IRAs for children. You cannot transfer stocks as a gift, as you can with a custodial account, and your child must have earned income to get started. But it is one approach to circumvent the kiddie tax issue.

Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a Principal Attorney.

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