Watch CBS News

How To Give Financial Gifts

Money makes a great gift: It always fits and never needs to be returned. As Personal Finance Adviser Ray Martin explains on The Saturday Early Show, such a gift can increase in value over time.

For instance, suppose grandparents set aside $2,000 for a grandchild when that child is born. By the time the child is ready to retire, 65 years later, the $2,000 potentially will have grown to $1 million. Gifts of investments never have been more affordable or accessible to people of all income levels.

The DON'Ts of giving money:

  • DON'T buy a life insurance policy
  • DON'T give savings bonds
  • DON'T give single shares of stock
The DOs of giving money:
  • DO give stock you already own
  • DO use a discount broker
  • DO consider mutual funds
More About The DON'Ts:
  • Life Insurance Policies: Believe it or not, people sometimes give life insurance policies to children. This is a mistake. True, it's much cheaper to purchase life insurance for a child than an adult. But don't fall into the "they will need this some day" mindset. The whole purpose of such a policy is to help dependents following the death of a breadwinner. Who is a 10-year-old supporting? The policy is too expensive to maintain for this to make sense.
  • Savings Bonds/One or Two Shares of Stocks: In order for a child to get the most out of your financial gift, also stay away from savings bonds which have a low rate of return. Right now, that rate is 4.07 percent. Comparatively, stock has the potential to grow at a long-term rate of 8 to 10 percent.

    While stock is an excellent gift option, people often make the mistake of giving only one or two shares of a stock. When it comes time to sell, the handling fee of $20-$30 could be more than the stock's value! As a general rule, this fee should comprise no more than five percent of the total stock value. That means buying roughly $400 worth of stocks. But don't be scared away. In addition to its high rate of return, this gift also can make financial sense for the giver.

More About The DOs:
  • Stocks: Ideally, give shares of appreciated stock that you already own, by simply signing it over to them. That way, you avoid a handling fee. More importantly, when the child eventually sells it, the gain will be taxed at lower capital gains rate of 10 or 8 percent.

    If you decide to buy stock, use a discount brokerage account such as those offered by Buy and Hold.com. This online brokerage offers more than 4,000 stocks.

    The two cheapest routes to investment are:

    1. For $6.99 a month, you get two free trades. Additional trades are $2.99.
    2. For $14.99 a month, you can have unlimited trades. (Again, that's compared to $20 to $30 if you go through a stock broker.) For that kind of price, you can reasonably purchase as little as $60 in stocks.

  • similar option is offered by sharebuilder.com. Look for stocks in companies that kids relate to, like Gap, Nike or McDonalds. Include the stock certificate with a sweatshirt from the Gap or gift certificates from McDonalds.
  • Mutual Funds: Though they can be more expensive, mutual funds offer similar advantages to stock. And several funds geared toward children offer kid-friendly newsletters, fund reports and Web sites. Your financial gift can be an educational one, too.

    Two fund suggestions:

    1. Oppenheimer Capital Appreciation Fund: No minimum purchase, mandatory investment of $25 a month.
    2. Punam Research A Fund: Minimum initial of $500, mandatory investment of $25 a month.
Other Guidelines For Giving:

Keep in mind that you can be too generous and attract the attention of the IRS. More specifically, if you give more than $10,000 to an individual, you will incur a gift tax of at least 37 percent. This part of the tax code prevents the wealthy from giving away their assets during their lifetime to avoid estate taxes.

However, you can give $10,000 each year to as many individuals as you wish. A married couple can give $20,000 to as many individuals as they wish.

Another tax-free gift option: You can pay a grandchild's college tuition gift tax-free as long as your money goes directly to the educational institution.

©MMI, CBS Worldwide Inc. All Rights Reserved

View CBS News In
CBS News App Open
Chrome Safari Continue
Be the first to know
Get browser notifications for breaking news, live events, and exclusive reporting.