How to Buy Stock as a Gift for a Child

Gifting stock to a child offers a unique opportunity to foster financial literacy from an early age and contribute to their long-term financial well-being. This approach can help instill valuable lessons about investing, market dynamics, and the power of compounding returns. It provides a tangible asset that can grow significantly, potentially aiding future endeavors such as higher education or starting a business, and serves as a practical educational tool.

Choosing the Right Gifting Account

When considering gifting stock to a child, understanding the appropriate legal structures is a primary step. Two common options are Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, and trusts. Each offers distinct features regarding asset management, flexibility, and control.

UGMA and UTMA accounts are custodial accounts where an adult, known as the custodian, manages the gifted assets for the minor beneficiary. These gifts are irrevocable, meaning once the stock is placed into the account, it legally belongs to the child. UGMA accounts typically hold financial assets like stocks, bonds, and mutual funds, while UTMA accounts can hold a broader range of assets, including real estate and intellectual property. The custodian has a fiduciary duty to manage the assets prudently for the child’s benefit.

Alternatively, a trust can be established for gifting stock, offering greater customization and control over the assets. Trusts are more complex and costly to set up, usually requiring legal assistance to draft a formal trust document. This document outlines specific rules for how and when the assets can be distributed to the child, which can extend beyond the age of majority.

Compared to UGMA/UTMA accounts, trusts provide enhanced flexibility in terms of distribution age and conditions, allowing the grantor to maintain more control over the assets for a longer period. This increased control comes with higher administrative burdens and legal fees. UGMA/UTMA accounts are simpler and less expensive to establish and maintain, making them a popular choice for straightforward stock gifts.

Tax Considerations for Stock Gifts

Gifting stock to a child involves several tax implications for both the donor and the recipient.

The annual gift tax exclusion allows an individual to give a certain amount to any number of people each year without incurring gift tax or requiring a gift tax return. For 2025, this exclusion stands at $19,000 per recipient. If a gift exceeds this amount, the donor must file a Form 709, United States Gift Tax Return, though actual gift tax is typically not owed until the donor’s lifetime gift tax exemption is exhausted. The lifetime gift tax exemption for 2025 is a substantial $13.99 million per individual.

A significant consideration for children’s investment income is the “Kiddie Tax,” which applies to unearned income, such as dividends and capital gains, above a certain threshold. For 2025, the first $1,350 of a child’s unearned income is tax-free. The next $1,350 is taxed at the child’s typically lower income tax rate. Any unearned income exceeding $2,700 for the year is taxed at the parent’s marginal tax rate.

When gifted stock is eventually sold, capital gains tax may apply. The cost basis of the stock for the child is generally the donor’s original cost basis. If the stock is held for more than one year after the gift, any gain is considered a long-term capital gain, typically taxed at lower rates than short-term gains. Dividend income generated by the gifted stock is also considered unearned income and is subject to the Kiddie Tax rules.

Opening and Funding the Account

Establishing an account for gifting stock to a child involves practical steps, from selecting a financial institution to transferring assets. The process typically begins with choosing a brokerage firm that offers the specific account type you intend to use, such as a custodial UGMA/UTMA account or a trust account. Factors to evaluate include the firm’s fee structure, the range of investment options available, and the user-friendliness of their online platform.

Once a brokerage is selected, the account opening process requires completing an application form. For a custodial account, this usually involves providing personal information for the custodian, including their Social Security number and date of birth, along with the minor’s Social Security number and date of birth. Trust accounts require submitting the formal trust document, along with trustee and beneficiary information.

After the account is approved, the next step is funding it. Cash contributions can be made through various methods, such as electronic transfers (ACH), checks, or wire transfers. For those wishing to gift existing stock, shares can be transferred “in kind” directly into the new account. The brokerage will provide specific instructions and forms for these types of transfers.

Once funded, the custodian or trustee can then purchase specific stocks or other investments within the account. Brokerage platforms typically offer tools to research and execute trades, allowing for the strategic allocation of assets.

Control and Transfer of Assets

The type of account chosen for gifting stock significantly influences who controls the assets and when the child gains full legal access. For UGMA/UTMA accounts, the appointed custodian maintains legal control and management responsibilities over the assets. The custodian has a fiduciary duty to manage these investments prudently, making decisions that are in the best interest of the minor beneficiary. This management continues throughout the child’s minority.

A defining characteristic of UGMA/UTMA accounts is that the assets automatically transfer to the child upon reaching the age of majority. This age varies by state, typically ranging from 18 to 21 years old. At this point, the child gains full legal control over the account and its contents, with no further oversight from the former custodian. This automatic transfer means the custodian cannot dictate how the funds are used once the child reaches the specified age.

In contrast, trusts offer greater flexibility in defining the terms of asset control and transfer. A trustee manages the assets according to the detailed instructions outlined in the trust document. This document can specify conditions or ages for distribution that extend well beyond the standard age of majority. For example, a trust might stipulate that the child receives a portion of the assets at age 25, another at 30, and the remainder at 35, or upon meeting certain educational milestones.

Before the age of majority for UGMA/UTMA accounts, or before specified conditions are met for trusts, the child generally does not have direct access to the funds. However, the custodian or trustee can use the assets for the child’s benefit, such as for educational expenses, medical needs, or other support, as long as these expenditures align with their fiduciary duties and the terms of the account or trust. This structured control helps ensure the assets are preserved and utilized appropriately for the child’s future.