As adults, once we start investing, we all share the same sentiment. We all wish we had started investing earlier in life. Which brings me to today's topic: The Pro's & Con's of Gifting Stocks to Kids. We will discuss how stocks can be properly gifted to a child as well as the benefits and tax consequence involved.
The Breakdown
If you've never heard of Gifting Stocks, let me first break down what that looks like. Let's say you purchased stocks a few year back and those stocks have now gained lots of value. But instead of you cashing out those stocks, you want to gift those appreciated stocks to a deserving kid in your life. You can easily gift those valuable stocks. But before you jump into this gifting process, let's take a look at the Pro & Cons.
Pros of Gifting Stocks
Gifting is one of the greatly used tax avoidance strategies that the rich have used for decades. If you decided to sell your stocks after their value has risen, you would be responsible for paying capital gains taxes on the proceeds, which could be up to 15%.
To avoid paying taxes on the proceeds of a stock sell, you can gift the stocks to someone that has a income of less than $40,400, like a child. The child can then sell their shares and profit the gains and pay 0% tax as long as their income stays below $40,400.
If you want to calculate how much you would potentially pay in capital gains tax if you were to sell the stocks yourself, you can use this calculator.
Potential Cons
All of this sounds great, however, we have to keep in mind the tax laws around gifting of stocks. The IRS (Internal Revenue Service) allows you to gift up to $15,000 per year, per person. That gift amount absolutely includes the value of stock. Other examples of items that can be gifted are cash, land or a car. If you exceed the $15,000 tax limit, you will have to file a Gift Tax Return.
Things to keep in mind
If you are interested in giving a child stocks without Gifting the stocks, an alternative is to open up a Custodial Brokerage Account for the minor. A Custodial Brokerage Account will be co-owned between the child and their Custodian (an adult over the age of 18). The Custodian will need the child's social security number to open the account. Money placed in this account can be used to purchase stocks in behalf of the minor. Once the minor reaches either 18 or 21 (rules differ by state), the account will be solely owned by the child.