Buying stock for your children can give them a financial head start. That stock can produce a regular stream of income if it pays dividends. It can also appreciate in value over time if the company does well. You can even use it as a tool to teach your kids about saving and investing. While minors can't usually own securities in their own names, you can buy stock for your child in a custodial account.
Parents can purchase stocks for their adult children as well as their minor children. If you purchase stocks for your minor child, you'll set up a custodial account, which becomes the property of the child even though you can manage the account until the child reaches the age of majority.
UGMA and UTMA
The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) provide a legal means for giving securities, including stock, to minor children. These acts allow you to set up a custodial account for your child, with you acting as the custodian. You can buy stocks for that account in the same way that you would buy stocks for your own account, or you can transfer stocks you already own into your child's custodial account. The difference is that the stock in the custodial account belongs to your child, not to you.
Direct Investment Plans
A simple and inexpensive way of buying stock for your child is through a custodial account with a company that offers a direct investment plan. Direct investment plans, sometimes referred to as direct stock plans, allow you to purchase stock directly from the company, bypassing an investments broker and saving the commission costs. These plans typically require a minimum initial investment and an application fee, but subsequent investments can be as little as $25 for some plans. This makes it more accessible for a child to make regular investments.
Gift Tax on Stocks
Any stocks you buy for your child or transfer to your child are considered gifts. As of tax year 2019, each taxpayer can give up to $15,000 per year to any person, including your child, without triggering the federal gift tax. This means that you and your spouse can each give up to $15,000 to each child for a maximum tax-free transfer of up to $30,000 in assets per child.
These gifts are not considered income to your child, so she will not have to pay income taxes on the stock. But the value of the stock as of the day of transfer will become its basis for tax purposes.
Your Child's Property
Any stock purchased for or transferred to your child's custodial account immediately and irrevocably becomes your child's property. Your child will be responsible for taxes on any dividends or capital gains produced by the securities in the account. Once your child reaches the age of majority for your state, typically either age 18 or 21, the custodial account will become a regular account. Your child will have full access to the account and be able to do whatever she wants with the securities in that account.