TL;DR
- Many adults decide to gift stock to a child because over the child’s lifetime the original stock has the potential to substantially grow in value
- When gifting stock to a child, it may be best to open a custodial account, which is simply an investment account created in a child’s name
- In a custodial account, the child’s control of the assets is deferred until she reaches the age of 18 or 21 (state law dependent)
- In most situations, it won’t be until the child sells the stock that capital gains taxes will be applied
Why gift stock to a child?
While giving the gift of stock is not usually the first idea that comes to mind when holiday shopping, it may be worth a second thought this season. Although untraditional, stock does have the potential to be the gift that keeps on giving, especially if it’s given to a young child. Many adults decide to gift stock to a child because the longer a stock is held, the higher likelihood that it grows in value. Therefore, when the child is older and in greater need of money, the stock can be sold for a substantial gain. The gift of stock early in life can end up fueling larger purchases or savings later in life such as a house or a retirement plan. On the other hand, some people are more interested in gifting stock for the educational value that it can provide. Gifting stock can be a great way to get a child interested in the stock market at an early age.
How to gift stock to a child
There are a few different ways to buy stock for another person. You can transfer shares from your brokerage account to the recipient’s brokerage account, you can physically transfer the stock in certificate form, or you can buy the stock in the recipient’s name. While some of these options are easier than others, if you are looking to gift stock to a child, it may be best to set up a custodial account. A custodial account is simply an investment account that you can create in a child’s name. Any money or stock that is deposited into a custodial account belongs to the child, but as long as the child is a minor you would be in control of managing and investing any funds within it. Therefore, once the child is of age (usually 18 or 21 years of age) the money can be used by the child in any way they wish, without regard for the original owner’s intentions. That being said, while you have control of the custodial account, it can be used as a great educational tool to show them the value of investing. Early interest and care for investing may provide the child with insight into how to handle the money within the custodial account when of age.
Tax implications on gifting stock
According to the IRS, gifts up to $16,000 are tax-free for an unlimited number of child or adult recipients in 2022.
If you give any gifts worth $16,000+, subtract it from your lifetime gift-tax exemption. You can give gifts worth up to $12.06 million in your lifetime before being hit with gift tax.
As for the recipient, it isn’t until she sells the stock that it will be taxed. Assuming the child sells the purchased stock much later in life, the sale would be subject to a capital gains tax. A capital gains tax is favorable when compared to the federal income tax rate. Read more about capital gains tax implications here.
Bottom line
Although it’s not often on the top of a child’s birthday or holiday list, giving the gift of stock to a child has many upsides. Over the lifetime of the child, stock has the potential to grow considerably in value. The stock gifted to a child at a young age may be used to buy a first home or kick start a retirement fund, later in life. In addition, investing on behalf of a child can be a great teaching moment. Fostering interest in investing and the stock market early in life can help teach a child the power and value of being fiscally responsible. When investing on behalf of a minor, it may be smart to set up a custodial account, where you can control investment decisions until the child is of age. Talk to a financial advisor about your options if you are interested in giving the gift of stock to a child this holiday season.