Not to freak you out, but holiday gift-giving time is around the corner.
I find the holidays stressful not only because they’re expensive, but because there’s so much pressure to choose the perfect gift.
Here’s a gift option you might not have previously considered: an investment.
Nobody dislikes receiving cash, but as the gift-giver you may want to bestow something that’s more personal. And instead of a gift card, an investment could be a more informed choice. Because when managed properly, an investment will continue to pay you dividends for decades down the road.
I recently wrote a guest post for Betterment’s blog on why investments make a great graduation gift. Although Betterment has features that make it easy to gift an investment account (more on this later), there are many ways to give investments as a gift.
U.S. Treasury savings bonds have been a traditional way to give an investment because you could buy paper savings bonds at the bank and simply gift them to the recipient. Paper savings bonds have been phased out unless you use your tax refund to purchase them, but you can still buy and gift savings bonds electronically via the TreasuryDirect.gov website.
Stocks or Mutual Funds
Although savings bonds are an easy way to give an investment that’s stable and will earn interest over time, a younger gift recipient might prefer an investment that, although risky, is more likely to provide bigger returns over 10, 20 or even 40 years. If the person you’re buying for is a budding Warren Buffett, you can give her recognition for her prowess with a few shares of stock she can monitor and trade herself.
Giving stocks or mutual funds can be tricky. If you already do business at any major online broker, you will have to open a custodial account on behalf of the recipient and purchase the shares of the desired stock or mutual fund within that account. Unless you’re a parent or grandparent intent on gifting many shares over time, this may be excessive.
If your goal is to give a single share of stock as a gift, two companies, OneShare.com and GiveaShare.com, make this easy. You can choose from several hundreds big-name stocks and the recipient will receive a paper stock certificate, something most companies don’t issue any more. OneShare.com charges a $39 fee per certificate plus the cost of the stock. Framing and engraving are optional for an extra charge.
Betterment.com is a simple investing platform that lets members invest in the entire stock and bond markets with just one decision: what percentage do you invest in stocks, and what percentage in bonds?
Betterment makes it easier to give a stock and bond account in any denomination. With the Betterment Gifts feature, giving investments is streamlined, and the recipient doesn’t have to be a Buffett disciple to begin building upon your gift with regular contributions. [Note: the recipient will need to have a registry set up before you can contribute to her account, but this is quick].
Don’t forget to add some advice
No matter what investment you decide to gift, it’s probably a good idea to follow up on it with some advice. Steer clear of being a helicopter investor (making the gift burdensome and too-many-strings-attached), but a few tips (even just written on a nice card) can make the new responsibility less intimidating.
You might, for example, point them to a savings return calculator like this one and show how $10,000 invested in stocks at 22 could turn into over $217,000 by age 62…without a single additional contribution (assuming an average 8 percent annual return).
A note about taxes
According to accountant Mark Kane, of Petrow, Vincent & Kane, P.C., in Indianapolis, there are several things to keep in mind when giving a gift.
A gift is a gift.
Once you give property to somebody, cash or other assets, it becomes property of the recipient and the giver loses control. A trust is one way to mitigate this control risk but ensure the assets in trust ultimate go to the recipient.
The gift tax applies.
You can give a gift of $13,000 to as many recipients each year as desired without filing a gift tax return or reducing their lifetime gifting exemption. However, if a donor gives more than $13,000 in a year to a single recipient, the gift is taxable and will start to reduce the donor’s lifetime giving exemption.
Gifts of appreciated investment assets shifts the capital gains tax on the appreciation to the recipient.
This doesn’t apply if you buy new stocks for a recipient, but if you decide to give investments that you have held prior to gifting them, the recipient will assume your cost basis and holding period. This is important because if the recipient sells the investments, he or she will be responsible for paying capital gains taxes on any gains from when you first bought them.
This is especially important if the recipient is under 19 or under 24 and a full-time student. These recipients will be subject to the “Kiddie Tax” on any unearned income over $1,900.
Despite these tax considerations, investments make great gifts – for younger relatives or even for friends graduating or getting married. Although it’s straightforward to give investments as gifts in the ways we described above, you’ll want to consult a CPA if you’ll be giving more than $13,000 or gifts of appreciated investment assets.