Graduation season is in full swing and for many Americans that means one thing: It’s time to head to the ATM.
Cash is expected to be the go-to gift again this year for new grads, followed by greeting cards and gift cards, according to survey results released this month by the National Retail Federation. The appeal is obvious: The recipient can spend the money how she pleases, there’s no hassle with receipts or returns and minimal effort is required of the giver.
If you like the idea of giving cash but want something with more oomph, consider stock. It potentially has a longer shelf life and higher returns. A gift of stock also helps a recipient learn how to invest.
There are some considerations unique to gifting stock, however, including understanding the intended recipient’s immediate financial needs. Here are four questions to consider before you give stock.
1. Are stocks the right gift?
It’s generous to help someone invest for the future, but be cognizant of the recipient’s pressing needs. Does the new grad have high-interest credit card debt? Is he facing uncertain job prospects? Does she have forthcoming expenses (moving to a new city, for example) that could push her into debt?
If “yes” is the answer to any of the scenarios above, the gift of investments may not be practical. Even worse, a cash-strapped new grad could be tempted to sell the stocks and forgo the long-term benefits while also triggering taxes.
If the gift is for a minor, there are ways to limit when or how she’ll access that investment. By setting up a custodial account, you’ll manage the account on her behalf until she’s of age (generally 18 or 21 years old, though some states allow you to specify an older age). At that point, she’ll be free to do with it as she pleases.
There are two basic ways to give stocks: transferring shares you already own or buying new ones. Deciding which is best will depend on your current holdings and the tax implications for the recipient.
Since the gift is being made with the recipient’s best interest in mind, you should know that transferring shares to them means you’re also transferring any capital gains tax burden for those shares. When it comes time to sell, they’ll face realized capital gains based on the stock’s value when you first bought it.
For example, if you’re gifting 100 shares of a company that you bought at $25 a share and the recipient sells when the stock’s trading at $40 a share, they’ll pay taxes on a capital gain of $1,500. If instead you were to buy and gift new shares of that same stock when it was trading at $35 per share and they sold it at $40, they would only pay capital gains on $500.
If you still want to transfer shares of an existing holding, the process varies depending on how you hold the stock — in a paper certificate, with a brokerage or through direct registration with the company. Contact the institution that oversees your holdings to find out what steps and paperwork are needed to complete the transfer.
In general, you’ll need the following: a description of the securities you’re gifting (company name, ticker symbol and number of shares), your account number and your contact information, as well as the recipient’s full name, Social Security number, contact information and the account where the investment should be transferred.
If the recipient is a newbie to the world of investing and doesn’t have a brokerage account, you may be able to transfer stocks through the Direct Registration System. This will put the recipient on the books as an investor with the company.
If you’re looking to give a stock you don’t currently own (or you don’t want to part with your own shares), you have choices. Much like a transfer, you’ll need to direct this purchase to an account in the recipient’s name by buying shares directly through the issuing company or a brokerage.
Several websites cater to people who want to give stock, including GiveAshare.com, SparkGift.com and Stockpile.com, but there can be a premium for novelty. Buying one share of a company and having the certificate framed could cost as much as twice the stock’s current trading price on GiveAshare, for example. For any of these sites, be sure to check fees, which may be higher than a traditional brokerage.
Whether you’re transferring shares or buying new ones to kickstart a new grad’s investment portfolio, there are likely limits to your generosity. The IRS agrees.
You can give annual gifts up to $14,000 (which includes the value of stocks) to any number of recipients and you’ll be exempt from paying federal gift taxes. Go above that amount and you’ll owe.
Your altruism has other tax implications, as well. You get a tax benefit when transferring stock by avoiding capital gains taxes on that investment, but as noted above, the recipient assumes that burden. For new investments, there’s no capital-gains tax benefit for the giver and the cost basis for the recipient is the value of the investment at the time of purchase.
4. What lessons do you want to impart?
Cash may be king at graduation, but it’s also here today, gone tomorrow. Stock gifts can be memorable and meaningful beyond the potential for financial gains, as Alex Whitehouse’s story shows. As a toddler, he received 10 shares in a utility company from his grandfather.
“At first I was just excited to receive something in the mail with my name on it, but later on it sparked an interest in the stock market and an appreciation for the impact of reinvested dividends,” says Whitehouse, who is now president of Whitehouse Wealth Management in Vancouver, Washington. “That gift had a huge impact on me. It led me on the path to becoming a financial advisor.”
Now, Whitehouse helps his clients pay this forward, recommending grandparents gift stock to their grandchildren, particularly shares of companies that will resonate with the younger generation.
Stock gifts require more planning than stuffing money into a greeting card. But by making that effort, perhaps you’ll spark an early interest in investing or help the recipient plan for the future — and it’s impossible to predict where that may lead.