07 Nov Grandparents want to give gift of stock or cash. What’s better?

Q. My parents want to give money to my minor children for holidays and their birthdays and other occasions. It would be $500 a pop. Dad wants to buy them a stock each time. Mom wants to give the cash. What’s the best choice? The kids are 5, 3 and 1.
— Unsure

A. What generous grandparents!

There are several items to consider here.

First, children can’t own assets in their name, so you will be involved in the management of the funds as a custodian whether they’re given cash or investments, said Jeanne Kane, a certified financial planner with OneDigital in Boonton.

“If you put cash in the bank, you need to set up a custodial account or joint account with your children,” she said. “If you want to invest the funds, you need to set up a Uniforms Transfers to Minors Account UTMA or Uniforms Gift to Minors Account (UGMA) account.”

With custodial accounts, once the child reaches the age of majority in your state, the account is now the child’s, and they can spend the money any way they want, she said.

Kane said cash gives you flexibility, and you would have to decide how you would want to use the funds. For example, would there be a small gift for the child and the balance saved or invested? Or are you saving for college, and would you earmark the funds for that goal?

If college is the goal, Kane called 529 accounts a fantastic way to save tax-free if funds are used for qualified educational expenses.

If you like the idea of investing, like Grandpa’s individual stock suggestion, you may want to consider more diversification by investing in mutual funds or exchange-traded funds, she said.

But let’s compare cash or investments, and what happens if you use a 529 plan.

Investing in individual stocks has greater risk than well-diversified investments, Kane said.

“Individual stocks have boom/bust potential whereas a mutual fund or an exchange-traded fund is comprised of a bundle of stocks,” she said.

There can also be an emotional attachment to individual stocks which bias your view on the investment.

“If your dad buys stock for your child, what happens if you want to sell?” Kane asked. “If Dad hand-picked the stock specifically for your child, will it be an issue and strain your relationship if you sell it?”

You and your child may hold onto a stock that has performed poorly just because your dad bought it for them, Kane said.

“Investors don’t make the best financial decisions when emotions are involved,” she said. “There is less of an emotional attachment to an index, mutual or exchange-traded fund such as one that mirrors the S&P 500.”

You should also be aware of the so-called kiddie tax.

“The kiddie tax is a tax law created to address investment and unearned income tax for children 18 years of age or under, or dependent full-time students under age 24,” she said. “It prevents a potential tax loophole where parents had an advantage of putting investments in their child’s name with the view that children earn little to nothing so taxes would be less.”

Under the kiddie tax, children get a certain amount of unearned income tax-free, then another portion at their own rate and then any amount over that is taxed at the parent’s rate, Kane said.

The first $0 to $1,250 of unearned income is tax-free, then from $1,251 to $2,500 of income is taxed at child’s tax rate, and anything over $2,501 is taxed at parent’s tax rate, Kane said

“Both parents have good intentions but mom’s option of gifting cash gives you more flexibility to save, invest, or spend in a way that best meets your family and child’s needs,” Kane said.

Also keep in mind that as your children get older, you could get them involved and teach them about investments, which could be a wonderful bonding opportunity with their grandparents, Kane said.

“Regardless of the way that your parents choose to gift, they should also keep in mind that they should be consistent gifting for all their current and potential future grandchildren,” Kane said.

This will help eliminate any resentment that could happen if the gifting isn’t equitable, she said.

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This story was originally published on Nov. 7, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.