This holiday season give the gift that can keep on creating wealth: stocks. Along with appreciating value, the gift of a stock will also serve as a valuable learning experience for any investor.
But you can’t order a stock off Amazon, nor will Santa be sliding down the chimney with blue-chip stock certificates. If you want to gift stock to loved one, there are several options, as well as a few important points to keep in mind.
Among the most convenient ways to gift a stock, according to James Royal, author of The Zen of Thrift Conversions and a Bankrate analyst, is via a gift card. “Stockpile allows you to buy a gift card for a stock and then the recipient redeems the gift card for ownership.”
With a Stockpile gift card or e-gift card you can give between $1 and $2,000 to buy shares, or fractional shares, of a stock. Your recipient can then redeem the gift card and create an account with Stockpile.
Stockpile also offers custodial accounts, which allows guardians to monitor minors’ investments.
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You can also give stock via brokerage accounts. Royal recommends using brokerage accounts for anyone that wants to set up recurring fund transfers.
If the recipient has the same brokerage firm as the sender, the process is as simple as transferring shares electronically. However, if the recipient is outside of the sender’s brokerage firm, Royal says it will take more time to get the gift set up. “You’ll need information like their Social Security number, account number, and name. Obviously, this is all very sensitive information and needs to be handled with care. You can’t surprise someone with this sort of gift,” he said.
It should be noted that the recipients will pay a capital gains tax when they sell their gifted stock. The severity of the tax will depend on how long the individual holds onto the stock. If they sell within a year of receiving the stock, they will be subject to short-term capital gains, which are higher than long-term capital gains — investments held for over one year.
For anyone wishing to give over $15,000, you will incur a gift tax. If you are looking to transfer a substantial amount, you might want to consider a trust. A trust will allow you to postpone the recipient’s access and ensure that the money will be used for its intended purpose.
If you wish to give investment wealth to a child, Royal suggests a 529 savings plan. “With a 529 anyone can contribute. They’ll be investing in that child’s education.”
529 plans allow parents to save after-tax dollars for education expenses. The savings grow tax-free as long as they are ultimately used for qualified education expenses.
Savings bonds are another option. They are issued by the U.S. Treasury and backed by the federal government, and pay an interest rate monthly. When the bonds mature, the government will pay the bonds original value plus accrued interest. However, with interest rates currently at record lows, not much value will be added.
Royal noted that those wishing to give the gift of market wealth can also donate stock to charities. “Someone can donate the appreciated value of a stock(s) and avoid taxes while the charity gets the full value of the stock. Everyone wins in here.”
Make sure that the charity qualifies for tax-deductible contributions and make sure to get any donations in by the end of the year to guarantee a write-off.
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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.