As you grow older, the holiday season seemingly changes from the end of the year to the entire year. While end-of-year holidays continue, birthdays, weddings, and other celebrations take place year-round. Have you ever drawn a blank when it was time to buy a gift?
Why not give stock?
Perhaps one of the most thoughtful gifts you could ever give, stock not only provides something valuable to recipients, it sets the stage for their improved long-term financial health. Receiving stock as a gift can even open the recipient’s eyes to what investing can do over time.
How to Give Stock as a Gift
Giving stock as a gift is a relatively simple two-step process. First, you’ll have to decide which shares of stock you’re interested in giving and how many shares you’ll give. Then, you will need to transfer those shares to the person you’re giving the gift to.
Decide Which Stock or ETF You’ll Give
You can gift shares of stocks or exchange-traded funds (ETFs). Keep the recipient in mind when choosing which stock or ETF to give. For example, although a biotechnology stock given to a 12-year-old could teach them something, a share of Disney, Nintendo, or another name related to something they enjoy would likely pique their interest a bit more.
You’ll also want to consider the past performance of the particular stocks you’re interested in turning into a gift. After all, the goal here is to give someone something that will grow in value. Although past performance isn’t always indicative of future results, some stocks have more consistent histories than others.
If you’re stuck, you may want to check out GiveAShare.com. The website lists the top 10 gift stocks, with the top on the list including:
- Walt Disney (NYSE: DIS). The iconic entertainment company sits at the top of the list.
- Apple (NASDAQ: AAPL). Apple is a global leader in tech and the pioneer behind the iPhone.
- Coca-Cola (NYSE: KO). A household name, Coca-Cola is yet another iconic company at the top of the GiveAShare.com list.
Transfer the Stock to the Recipient
There are two ways to transfer ownership of a gift stock to the recipient. How you go about the transfer depends on whether the shares you intend on giving are physical stock certificates or held by a broker.
Gifting Stock via Broker-to-Broker Transfer
If the shares you’re planning on giving are held in a brokerage account, they will need to be transferred from your account to the gift recipient’s account. To do so, you’ll need the following information:
- Sender. You’ll need the name on your account and your address, as well as your account number and a description of the stock you plan to give as a gift, including the number of shares and the full company name.
- Recipient. In order to ensure your recipient receives the shares you’re sending, you’ll need the name of the brokerage firm they work with, the name on their account, their Social Security number, and their account number.
Once you have this information, it’s time to contact your broker. With most brokers, you’ll need to fill out a written authorization form giving the broker your permission to transfer shares. Larger, more reputable brokers will generally have this form online for simple processing.
It’s important to keep in mind that the receiving financial institution will generally have to be notified by the recipient to complete the ownership transfer. So, for broker-to-broker transfers, the person you’re giving the gift to will need to get involved to accept ownership.
Gifting Stock via Stock Certificate Transfer
If the stock you plan on transferring as a gift is a physical certificate, you will need that certificate, the recipient, and a guarantor, which is generally your bank or broker. The stock is transferred by signing the stock certificate in the presence of the grantor, legally transferring ownership of the stock.
Once this transfer is complete, the ownership is held by the recipient. Keep in mind that in some cases, there is a form on the back of the stock certificate regarding the transfer of ownership. If this form exists on your stock certificate, it must be filled out completely and correctly for the transfer of ownership to take place.
Giving Stock to a Child
Giving stock to a child is a bit different than giving stock to an adult. Most children don’t have brokerage accounts, or even checking accounts for that matter. Moreover, legal and financial responsibility for children lies with their parents or guardians.
As a result, when giving stock as a gift to a child, there are a couple of other steps that must take place:
- Discuss the Gift With the Parents. Tell the parents that you intend to give their child stock as a gift. Explain that the gift must be sent to a custodial account, which is an account owned by the child but managed by the adult.
- Work With the Parents. Work with the parents of the child to set up a custodial account if one doesn’t already exist, and transfer shares to that account using the steps above. Custodial accounts can be set up with most brokers like E*Trade and Stash.
Why Give Stock as a Gift?
As you can see, giving stock as a gift is a relatively simple process, but why would you want to do so? What are the benefits of giving these types of gifts? There’s likely much more to this gift idea than you think:
Longevity of Your Gift
If you’re like most people, you’ve given gift cards, boxes of candy, toys, and other products as gifts, all of which seem to have a lifespan of a couple of months at best. However, a gift certificate and a stock certificate are two different things.
When you give the gift of stock, you’re giving something that has the potential to grow in value over time and to make quarterly or annual dividend payments to the person you’re giving the gift to, ultimately giving the recipient a reason to hold onto that gift for the long haul.
Giving stock lets you give a gift that lasts by providing ongoing value to the gift recipient.
Teach Children About the Stock Market
Finances aren’t talked about much in school. Your children, grandchildren, nieces and nephews may learn what the stock market is, and may even simulate investing for a week, but the intricacies of financial wellness simply aren’t taught.
That’s an area where many believe reform is necessary, but until that happens, teaching kids about money is a job for parents and loved ones. Giving stock as a gift is a great way to do just that.
Investing and personal finance are very important topics, and a stock gift is a great introduction to them both. Through this gift, you’ll be able to teach children that investing a few dollars in a stock now can result in more money later, giving children more incentive to save.
Moreover, as the stock pays dividends, children will learn about income from investments and dividend reinvestment plans. Should they be guided in the right direction, you might soon find the children investing their own money in new shares, beginning to work on building their financial stability even before graduating high school.
The bottom line is that financial literacy is a gift that pays in the long run.
Encourage Family and Friends to Start Investing
Young adults often fail to realize the value of investing, especially thanks to the fact that most high schools don’t offer financial literacy classes.
The early years of adulthood are when financial habits are born — good or bad. Giving someone you love stock as a gift could set the stage for positive habits like saving and investing for the future.
After all, if you give a young adult a few shares of stock and the recipient realizes a year later they’ve experienced growth in value, they’re more likely to buy more shares, either of that stock or other companies they’re interested in investing in.
Ultimately, with a few shares of stock, you can become a pivotal force in the positive financial habits formed by your loved ones for years to come.
Important Factors to Consider
There are a few important facts that you’ll want to consider before giving the gift of stock.
Capital Gains Taxes
The recipient of the stock will be required to pay the capital gains taxes associated with those shares when they decide to cash it in. It’s important to keep in mind that the recipient will have to pay capital gains tax on the original cost basis to the IRS.
For example, let’s say you purchased a stock 20 years ago at $5 per share that has a fair market value of $100 per share today. If you give those shares as a gift now, when they’re cashed in, the recipient will have to pay the taxes on gains above your original $5-per-share mark.
As a result, when giving stock as a gift, it’s a good idea to purchase new shares in order to avoid any undue tax burden the recipient would have on an appreciated stock.
Fractional shares are all the rage these days, giving investors the ability to tap into stocks based on the amount of money they’d like to invest, rather than the per-share price of the stock. However, if you plan on giving fractional shares of a stock, there’s a major factor to think about.
Does the recipient’s broker support fractions of shares?
If the recipient’s broker doesn’t support the ownership of pieces of stock, there are two solutions:
- Give Whole Shares. Instead of basing your gift on a total dollar amount, give the amount of whole shares you can afford to purchase within the budget you plan to spend.
- Talk to the Recipient. You may also want to talk to the recipient about opening a brokerage account with a broker that does support fractional shares in order to accept the gift you plan to give.
In the United States, there may not be taxation without representation, but thanks to the complexity of the tax code, there are plenty of taxes you may not be completely aware of. One tax people don’t commonly think about is the gift tax.
That’s right, based on certain criteria, your gift — no matter what it is — can be taxed.
In particular, gift taxes apply when the value of a gift is over $15,000 in a single year. And while that seems like a threshold that’s safely above most annual gift budgets, there are cases where even more modest gifts can run into the gift tax.
For example, say you decide to hold the stock you give as gifts in an account in your name to ensure that they’re saved. For example, parents or grandparents may gradually build up shares of a stock for a child with the intention of transferring them when the child graduates high school. Over time, if those shares grow to a value of more than $15,000 before they’re transferred, the recipient will have to pay gift taxes.
However, there is a workaround.
To avoid this issue, open a custodial account and transfer the shares into it as they’re purchased. Although the child who owns the custodial account does own the shares in it, they must receive permission from the adult on the account to do anything with it, giving parents or grandparents the ability to control shares while the recipient is young without passing an undue tax burden on to them when shares are transferred.
A simple search online will yield plenty of gift ideas if you’re at a loss, but there are few gifts out there that are as meaningful and can do as much for the recipient as shares of stock.
Giving the gift of stock is ultimately giving the gift of financial literacy, and it’s a gift that may light a spark which leads to a lifestyle with a strong financial foundation.
As is the case when buying stock for yourself, make sure you do your research and pick a quality company that’s likely to grow in value. As the value of the stock climbs, the recipient’s interest in investing and building their wealth will likely grow as well.