Why stocks can be gift that keeps on giving to kids
Expert: No tax burden on 2021 gifts of up to $15K
Let’s face it, getting kids the latest gaming console, smartphone, or laptop for Christmas is the popular choice. But for those who may consider the option of giving stock to kids this holiday season, two experts believe that it’s potentially the best value in the long run.
“Gifting stocks could be a great way to teach children about saving and investing as well as learning about how the stock market works,” said Eva Victor, director of wealth planning at Girard, a wealth management firm in Greater Philadelphia. “For some parents, grandparents, siblings, aunts, and uncles, it can also help create interest for kids in certain companies and industries.”
As the pandemic changes how we celebrate holidays, giving stocks may be a viable alternative as soaring prices and supply chain delays caused by COVID-19 limit what gifts you can put under the tree.
The holiday season is a traditional time that clients and advisers ponder how gifting, both charitable and otherwise, can be weaved into strategic yearend tax planning, offering a win-win, Victor said.
So, how should you go about gifting stocks?
An individual can give stocks purchased specifically for a child, or give shares he or she already owns from an existing investment portfolio, Victor said. A stock transfer or gift can be done either through a transfer of a physical certificate or electronic transfer through a broker, she added.
Gifts of stock to family members or other individuals also can be made without federal gift tax by using the annual gift exclusion. Currently, Victor said that every donor can make annual gifts of up to $15,000 (for 2021) to an unlimited number of recipients with no gift tax consequence or filing requirement.
A couple could, for example, give up to $30,000 to every child and grandchild under this annual exclusion, Victor said. Any unused annual exclusion doesn’t carry over to later years
Keep in mind that to make use of this exclusion for 2021, the gift must be made by Dec. 31, Victor said.
“It’s a ‘use it or lose it proposition,’ so don’t wait until it gets too late,” said Victor, who believes the inflation-adjusted gift exclusion rate will be at $16,000 in 2022.
Also, gifts to minors can be established in a custodial account by a parent or a trusted adult, or placed in a trust until they reach either age 18 or 21, Victor said.
“It’s great to have that peace of mind – to have a set of instructions ... to make the funds available when they reach a certain age,” Victor said.
In the case of kids, make sure any money-related gift will be something that interests them, said Tim McGrath, a certified financial planner and founding partner of Riverpoint Wealth Management based in Chicago.
“If they want to buy a kid some stock, find something that they are passionate and interested in and would invest in over time,” McGrath said. “If they have an interest in tech, get them involved with a tech-based company so they might find that more intriguing. Make it worth their effort.”
While McGrath supports giving stocks to kids, he also recommends giving them a Roth IRA their parents can manage until their child is legally old enough to take charge of it.
McGrath said Roth IRA contributions are not tax-deductible and are usually funded with after-tax contributions that can be withdrawn free of penalties and income taxes at any time. Or, adults could give open up a 529 savings plan for kids. This account is named after section 529 of the federal tax code, and no federal taxes are owed if you withdraw funds for qualified college costs or other tuition.
“There are a lot of viable options available for young people,” McGrath said.
Victor, the wealth management director at Girard, agreed.
“It’s a pretty wide range to teach (kids) about saving, investing, and learning financial discipline,” Victor said. “The earlier, the better.”