When I was a child, my father told me money doesn’t grow on trees. But each year at Christmas, my mother’s family would prove him wrong.
Children, grandchildren and great-grandchildren would tie cash to a small tree and present it to my great-grandmother. Like many retirees, she was on a fixed income. She was always grateful for the small indulgences she could buy with the money she “picked” from the tree.
Every year, it was the same. She would pick the tree clean. And 12 months later, we’d be back tying cash around its branches.
Looking back, my family should have planted my great-grandmother a real money tree instead. One that would bear fruit year after year.
Gifting stock is a great way to provide an “evergreen” source of income. Here are a few options to help your loved ones nurture their own money trees.
A simple way to introduce someone to investing is to give him or her shares of stock from your own account. It’s easy to transfer securities. Typically, your brokerage firm will provide you with a form. Or it’ll ask you to provide a letter authorizing the move.
If you are gifting stock to someone without an account, they will need to open one. If they’re a minor, you can open a custodial account.
To open a custodial account, you’ll need their Social Security number and other personal information. After the account is set up, you may add to it at any time. But remember, once you contribute to the account, you can’t take it back.
You will also need to designate a custodian (such as yourself or a parent) to manage the assets for the minor until they reach 18 or 21 years of age, depending on the state.
If the lucky beneficiary of your generosity already has a brokerage account, obviously, it’s a much simpler process. If they have the same broker dealer, simply provide your firm with the other account number. Then it will transfer the shares internally.
If the recipient already has an account at another firm, you will need the other firm’s DTC number – plus the account number – to transfer the stock. Every broker dealer has its own unique DTC number.
DTC stands for Depository Trust Company. It’s the part of the Federal Reserve where security ownership records are registered.
Once your firm has all of the counter party’s information, it will tell DTC to move the shares. There are some potential tax benefits when you gift shares as well. The recipient’s cost basis and purchase dates are calculated from the price and date of your original investment. This means they may sell the stock immediately and have the gain treated as a long-term capital gain taxed at a lower rate. But that’s a more complicated strategy for another day.
Stock Up on Gift Cards
Several startup companies such as Stockpile are trying to make it even easier to give shares of stock. They sell gift cards. The cards are similar to any other gift card – except the owner receives shares of stock instead of merchandise when they cash them in.
They are easy to find; I can buy them at my local office supply store. (You may also buy e-certificates online.) They are also easy to redeem. The holder goes to the website, enters the card code, opens an account and chooses which stock(s) to buy.
You can also buy fractional shares. So if your grandchild loves Apple (Nasdaq: AAPL) products, but your stock-gifting budget is below the company’s $100-plus share price, they can still own a piece of the stock.
Uncle Sam Wants His Gift, Too
When you are doling out shares, don’t forget about potential gift tax issues. The IRS allows you to give up to $14,000 ($28,000 per married couple) tax-free to each person annually.
Children may be subject to the “kiddie tax” as well. If a child’s unearned income (dividends and interest) is more than $2,100, part of it may be taxable at the parent’s tax rate – not the child’s.
The Gift Keeps on Giving
We’ve touched on only a few of the ways you can give the gift of investing. Other options include buying paper stock certificates, buying stock directly from a company or even funding a loved one’s 529 college savings plan.
You should weigh the pros and cons of each method and choose the best one for your situation.
And while the person on the receiving end may prefer to have the latest iPhone or hottest toy today, they will thank you tomorrow.
Just wait ‘til they see how much their money tree can grow.