Why Gifting Stock is The Best Thing You Can Do For a Child You Love (And How to Do It)

June 23, 2021
financial literacy

With so many options, it can be hard to decide what to give the children in your life. 

Especially if you want to give something with real impact.

Which is where gifting stock comes in. While most gifts are meaningful in the short term, stocks are a long-lasting gift that keeps giving.

Gift stocks are a wonderful investment in a child’s future. They’re also a great way to help set the young people in your life on a path to financial stability, while also teaching them about financial literacy. And the best part?

Any adult can gift a child stocks — from parents and distant relatives to close family friends.

In this article, you’ll learn what it means to gift stocks to a loved one, the benefits you and the beneficiary will receive, and how to get started today.

Why Gift Stock?

Let’s break down a few of the benefits of gifting stock:

Financial security

By gifting stock to a child, you’re making a long-term investment in that child’s future.

Why does gifting stock help shore up a child’s financial security?

A stock gift appreciates in value over time. Thanks to the benefit of accrued interest and the average return on investment (ROI) you can expect to generate through trading stocks, the gift of stock is more likely to have a lasting impact on a child’s future.

After all, cash doesn’t really increase in value — and sometimes even the most sentimental gifts end up getting sent in a box to Goodwill. But stock shares tend to go up in value without you having to lift a finger.

According to investment giant Goldman Sachs, the average 10-year stock market return over the past 140 years has come in at 9.2%. That being said, the S&P 500 has done slightly better over the last ten years, bringing in average returns of 13.6%.


Chart showing average monthly returns from the S&P 500 index.
(Image source)

Translation: if you buy shares of stock for the kids in your life now, the value of those shares is likely to rise every single year those kids hold onto the stock.

A great way to ensure those big returns are realized is to set up a custodial account for a child. 

Because they won’t gain access to the assets you’re saving for them until they reach the age of majority, that could give you up to two decades to gift stocks and watch those returns pile up.

Gifted stock will continue to appreciate long after your custodianship has ended, and you can rest easy knowing your loved ones have a nice big nest egg of stock shares to provide financial security.

Financial literacy

Gifting stock to a child you love isn’t just a great way to safeguard their financial future. It’s also a great way to teach them how finance works.

We don’t talk about it much as a society, but financial literacy is absolutely critical to a child’s success. 

Your financial literacy level dictates your ability to make sound financial decisions — and if nobody’s taught you the basics of compound interest, saving, debt, and how to budget, you may struggle to make responsible decisions with your money.

Unfortunately, the clock is really ticking here.

Statistically speaking, kids already have their financial habits pretty much set in stone by age seven. As a result, you’ve got to start teaching children early about how financial markets work.

That’s where the stock market comes in.

woman putting coins in piggy bank for child's future

By gifting stock to the kids in your life, they’ll be able to engage with the stock market. After all, every lesson is better served when something’s actually at stake — so giving a child a tangible asset to watch grow motivates them to learn more about that asset.

You can even involve them in the decision to buy or sell shares. Talk to them about a company’s financials, why they look good or bad, and show them how their shares increase over time.

Financial freedom

The greatest gift you can give a child is financial freedom. Maybe you want to send them to college when they hit 18, let them spend a year traveling the world, set up a new business, buy a house, get married — whatever they want.

The point is: we all want the kids we love to be happy. But the world can be tough, and a lot of young people leave school and are immediately thrust into a rat race that doesn’t exactly support dreamers.

By investing in the kids you love from an early age, you can do your part to help them bypass that rat race and start adult life off on the right foot.

A fantastic way to do that’s by gifting stocks, mutual fund shares, or other publicly traded securities. 

If you’re able to amass a decent enough portfolio using an investment vehicle like a custodial account, you’ll enable the kids in your life to step into the adult world armed with enough assets to leverage new opportunities.

More important still, you’ll be allowing the kids you love to make their own choices. Nothing could be more rewarding than that, right?

When to Gift Stock?

If you ask seasoned stock traders when they started investing, chances are the number one answer you’re going to get back is: “not soon enough”.

As we discussed, gifting stock is a fantastic way to empower the children you love with future financial security, improve their financial literacy, and give them the freedom to chase their dreams without having to constantly worry about their financial future.

But when is too early — or too late — to start? 

The short answer is: there’s no wrong time. 

There are clear benefits that the kids you love will be able to experience from receiving stock, regardless of their age.

Mother holding baby looking at bar chart

Let’s break it down into some broad age categories to help illustrate:

If you gift stock to a child aged 0-5, your gift has up to 18 years to appreciate in value. This means the stock you give a child will grow as they do. And they’ll experience some serious returns, thanks to the power of compounding. 

Between ages 6-11, kids start to firm up their financial habits, and they start to develop a sense of ownership and empowerment. So if you’d like to teach a child financial literacy, this is the perfect age bracket to gift stock and get them involved.

Ages 12-18 are all about preparing for adulthood. If you gift a stock to someone in this age group, you’ll be helping them learn how to evaluate an investment and get ready for looming financial independence.

Gifting Stock to Children: What You Need To Know

OK, so we’ve established that gifting stock is a good idea and that it’s never too early or too late to start. 

By gifting stock, you’ll be safeguarding a child’s financial future, teaching them critical financial literacy skills, and empowering them with the sort of financial freedom that a lot of us would have loved to have starting out.

But there are also some basic rules and tax implications you need to be aware of when giving kids the gift of stock shares. Let’s dive into them.

Account types

First thing’s first: you can’t just buy a share of some company and hand a stock certificate to a toddler. That’s not how it works.

Normally when you purchase stock, you’ve got to do so through a brokerage account. You’ve got to be at least 18 years old to set up an account with a stockbroker — and when you do, all of the shares in your brokerage account are your legal property.

So if you want to give stocks to the kids in your life and have the shares genuinely belong to them in the eyes of the law, they’ll need to have an account to ‘hold’ it in until they choose to sell it. 

The two most popular investment vehicles adults use to gift stocks to children are custodial accounts and 529 plans.

custodial accounts offer much more flexibility than 529 plans
(Image Source)

Custodial accounts

A custodial account is an ideal choice for adults that want to gift stocks and other assets with a bit more flexibility.

If the child doesn’t have a custodial account yet, you or someone else who wishes to be the custodian, will have to set one up. 

When you set up a custodial account, you’ve got to name a child beneficiary. 

From that point on, everything in the account belongs to the child — but because they’re too young to trade stock shares, you’re acting as the custodian of those assets. You’ll get to be the custodian until the child reaches the age of majority in their state, which is either 18 or 21.

After that, all the assets will pass onto the child.

Custodial accounts are designed to hold a range of financial assets, and are super flexible when it comes to withdrawals. 

As custodian, you can make a withdrawal as long as it’s for the beneficiary — and after the child comes of age, they can take money or stocks out of the account for whatever reason they want.

529 plans

A 529 plan is a college savings vehicle that parents and families use to save up for a child’s future education expenses.

When you set up a 529 plan, there are generally going to be limits on the stocks you can buy based on the account type, platform, and the rules in your state.

You’re then able to make cash withdrawals from a 529 plan to pay for certain qualified education expenses like college tuition — but most providers keep pretty specific definitions of what constitutes a qualified expense. 

That means if you invest in stock through a 529 plan, and the child you’re saving for doesn’t end up going to college, you’re kind of stuck between a rock and a hard place.

It’s important to note that with both a 529 plan and a custodial account, providers will generally prevent you from buying high-risk stocks or trading options that could jeopardize the savings you’re investing in the account.

If you’ve got a very risky investment style, that could be a turn-off. But if you’re looking for a steady and reliable way to invest in a child’s future, it’s going to be comforting to know that your investments aren’t being put in harm’s way. 

Gifting limits

When you gift shares of stock to someone, the Internal Revenue Service (IRS) won’t tax you for that gift — but only up to a certain amount.

At present, the IRS lets you gift up to $15,000 worth of cash or stock per year per person before it counts toward your lifetime exemption. 

That means you could gift three different children $10,000 worth of stock shares each, and you shouldn’t have to pay tax on any of those transactions.

Father with arm around sun standing next to pile of cash

But if you gifted shares worth more than $15,000 to one child, you’d need to fill out a Gift Tax Return.

At present, the IRS lifetime gift and estate tax exemption is $11.7 million per person.

Tax implications

The taxes you or your loved one may have to pay when you gift stock will depend on a number of factors. Those factors include:

  • Whether you bought the stock in your account and transferred it to the child or if you contributed money to their account for the purchase of stock
  • The type of account holding the stock

If you decide to gift stock to a child by setting up a custodial account, there’s a tax benefit because the assets contained in the account are the legal property of the minor beneficiary. 

That means any unearned income in a custodial account is charged at the child’s lower tax rate — up to a threshold of $2,200 per year. Any amount after that will be taxed at the adult custodian’s income tax rate. This should equate to a tax savings for most people.

If you choose to set up a 529 account to gift stock to a child, there’s one other key tax benefit. 

The contributions you make to a 529 plan are not deductible. But any earnings you accumulate in a child’s 529 plan through a capital gain or stock dividend grow tax-free. 

Nothing in the 529 plan will be taxed at the point of withdrawal, either — but only as long as the money is being put towards a qualified education expense. If you withdraw money for any other reason, you’ll have to pay tax on it, plus a penalty.

Conclusion

At the end of the day, gifting stocks is an incredible way to jumpstart your loved one’s investment portfolio. It empowers kids with the freedom to dream, and it can offer you some much-needed peace of mind about their financial future.

Just remember: when it comes to gifting shares, you should always start early. And if you’re looking to invest in a child’s future through stock, you should definitely check out EarlyBird.

EarlyBird is the industry's first-ever custodial account that lets multiple loved ones gift assets into an account. That means parents, cousins, siblings, friends, or anybody else will be able to fund a child's future with just a few easy steps.

Download the EarlyBird app today and start gifting stock to your loved ones.