Know the
Basics
Before Giving
Investments As Gifts
by Andrew Leckey
"It's
good for you."
While those words have brought grimaces to
the faces of children for generations, they're sometimes true.
A good example is when parents or grandparents give "good-for-you"
investments to youngsters as gifts.
"We bought a bunch of Walt Disney stock
for the kids to put in their custodian accounts because we felt
the price was right," said Marie Roth of Harrington Park,
NJ, who, with husband Jonathan, has a four-year-old daughter
and two-year-old son. "They don't really know yet that they
own Disney stock, but I personally think Disney is growing and
will be around forever."
When those children are old enough to comprehend
that the combined efforts of Mickey Mouse, Disney World and ESPN
are helping their parents pay for their college education, they'll
realize something good was indeed done for them. In the meantime,
however, they'd likely prefer a nicely wrapped holiday set of
Pokemon cards.
Know the basics. You can make a tax-free gift
of up to $10,000 each year to each child, with that annual amount
to be adjusted upward for inflation in future years. If both
husband and wife contribute, the total can be $20,000 per child.
That sum includes smaller gifts, such as $50 at Christmas or
birthdays. The current lifetime limit on such gifts is $650,000,
which grows to $675,000 in the 2000 tax year, then gradually
expands until it hits $1 million in the 2006 tax year.
Sometimes you may wish to give one of your
existing investments as a gift.
"No one should ever give away a stock
they already own that's lost money for them, since the recipient
can't use the tax loss and the gift giver could us it (to offset
gains)," advised Marilyn Capelli Dimitroff, certified financial
planner and president of Capelli Financial Services Inc., Bloomfield
Hills, MI. "Even with stocks that have a gain, look to see
if there's any advantage to the donor selling it versus the recipient
selling it."
Planning is key.
"The goal in both gift-tax and estate-tax planning is to try to give away property that has a lot of potential for future growth (since the child is in a lower tax bracket)," noted Martin Nissenbaum, national director of personal income tax planning for Ernst & Young in New York. "So if you have stocks that have appreciated substantially but you don't expect that much additional appreciation, you're better off keeping them and giving others instead as gifts."
If you're starting
fresh, mutual funds are a great beginning.
Stein Roe Young Investor Fund (800-338-2250)
has a shareholder report that explains investing to kids. The
fund boasts a 25 percent annualized return over five years thanks
to Cisco Systems, Microsoft, MCI WorldCom and General Electric.
It requires a $2,500 minimum initial investment, or $1,000 if
you join its automatic investment plan.
"It's an appealing package Stein Roe has
done a nice job with," said Russel Kinnel, mutual fund editor
for the Morningstar Mutual Funds investment advisory in Chicago.
"Or, you could instead opt for a fund you especially like
and then find some other education materials to explain investing
to your youngsters."
Among great gift choices, said Kinnel, is the
TIAA-CREF fund family (800-223-1200), with low-cost, diversified
funds permitting a $250 minimum investment, or $25 if you join
its automatic investment plan. These include TIA-CREF Growth
& Income, Equity Growth, International Equity and Managed
Allocation.
Individual stocks are another gift alternative.
"You can cement the lessons of investing
much more strongly with an individual company the child can relate
to," said Charles Carlson, editor of the DRIP Investor newsletter
in Hammond, IN. "If you invest through dividend reinvestment
plans (DRIPs) with low investment requirements, the kid can also
kick in a few bucks."
Let's say you invest $4,000 the day your grandchild
is born and never touch the investment again or make another
contribution. Assuming a 10 percent annual return, that $4,000
will grow to $2 million by the time the grandchild turns 65 years
old.
Offered by about 1,000 companies, DRIPs permit
current shareholders to purchase stock directly from the company,
bypassing the broker. Investors purchase shares with dividends
that the company reinvests for them in additional shares. Most
permit voluntary cash payments. When you've selected a specific
stock, find out whether it has a DRIP. In some cases, you must
buy the first share through a broker, while in others the company
sells the first share directly.
Once you're enrolled in the Coca-Cola Co. dividend
reinvestment plan (800-446-2617), for example, you can invest
with as little as $10. Some other companies with DRIPs Carlson
believes kids might be interested in are Sony Corp. (800-749-1687);
PepsiCo (800-226-0083); The Limited (800-317-4445), McDonald's
Corp. (800-774-4117) and Walt Disney (800-948-2222). Minimums
vary.
Capelli Dimitroff advises earmarking assets
for the kids but keeping them in the parents' or grandparents'
names for better control. Parents are taxed on the account at
the parent's tax rate. By opening an account under the Uniform
Transfers to Minors Act, taxation is at the children's more advantageous
tax rate, but it may negatively affect chances for college financial
aid. In addition, control reverts to the child at the age of
majority.
