How To Give Stock as a Gift
If you choose to give stock as a gift, there are ways to do it with no strings attached, or by placing specific restrictions on when and how the proceeds can be used.
Give Stock By Re-Titling Your Existing Stock Holdings
This method is appropriate if you want to give the stock as a gift with no strings attached—completely, totally unencumbered so the person can do whatever they want with it the moment they take possession
If you hold the shares you want to gift in a brokerage account or dividend reinvestment plan of your own, you can contact the institution and fill out forms to re-title some of your holdings in the name of the gift recipient. You can even set up regular gifts at predetermined intervals, such as the 5th of every month, or the second Tuesday of each quarter.
Here's an example: Charles Schwab & Co. has a form called Letter of Authorization for Movement of Funds that lets its clients create scheduled transfers of shares to third parties. Imagine after a lifetime of successful investing, you've built up a large position in Procter & Gamble. Once you set up and verify all the information, you can direct the broker, "I want you to gift 100 shares of Procter & Gamble to my child every month by taking the stock out of my account and putting it into their brokerage account."
Alternatively, if your child doesn't have a brokerage account at Schwab, the firm could send a physical stock certificate or have the shares registered directly in your child's name through the Direct Registration System. (Fees may apply for either of these services depending on your broker.)
Set Up a Direct Stock Purchase Plan In Their Name
With few exceptions, this couldn't be easier. You fill out a form, mail in a check if necessary, and that's it. The person receives a statement showing the number of shares they own, and can then buy more by mailing in additional checks, having automatic withdrawals set up from their bank account, or reinvesting any cash dividends their new stock pays. If you want to buy them more shares, many plans will allow you to write another check and send it in yourself, or write it directly to the person if you trust they'll use the funds to buy the stock you want to gift them.
What if you want a physical representation of ownership? Though stock certificates are becoming rare and, in some cases, companies refuse to issue them, you can check with a service like GiveaShare.com. They can title the stock in the name of the gift recipient. You might then be able to use that share to set up the DRIP, and hang the framed stock certificate on the wall.
Give Stock as a Gift with Restrictions on the Shares
If you don't want the gift recipient to have unrestricted access to the stock, several options exist:
Set Up a Custodial Account For Minors: These custodial accounts are unique because they allow you to name a custodian who has a duty to manage the money for the welfare of the minor, but the property belongs to the minor since gifts under the Uniform Transfers to Minors Act are irrevocable. Depending on the state, you can decide at the time the account is established if you want the minor to have the right to take possession of the assets at the age of 21, or some other age. A few states allow you to defer up to the child's 25th birthday, while some will allow possession as young as 18.
Establish a Trust Fund and Transfer Shares of Stock to It: Whether you want to give shares of stock to a minor or adult, the ultimate option in terms of flexibility is a trust fund. You can write a trust declaration that splits the legal title of the property between a trustee, who has a fiduciary duty to manage it with the utmost standard of care, and an economic beneficiary, who gets to enjoy the property in a way you determine.
How a Gift Trust Works
Say you hold a block of 10,000 shares of Royal Dutch Shell Class B ADR. You want to give the stock as a gift to your three grandchildren. You hire an attorney to write a basic trust document that says you are transferring all 10,000 shares to the trust. (A simple, straightforward trust will probably run you around $1,000 in legal fees, though this could vary widely by location.) You can stipulate that for the rest of their lives, 100% of the dividends paid on the stock be distributed equally to your grandkids at Christmas. When the last of them dies, the whole block—whatever it is worth—is to go to your alma mater to establish scholarships, just for example.
You can either convert your existing brokerage account into a trust by filling out the paperwork (some brokers will let you keep the same account number so nothing but the ownership changes) or set up a separate, new account under the trust's name and have the stock transferred to it using the re-titling process we've discussed.
In this case, you are able to give the stock as a gift but the grandkids can never touch it. Instead, they get to enjoy the dividends. This can represent tens of thousands each year. Over time, the checks should continue to grow larger. If you wanted to add restrictions on how the money can be used, you can limit it to buying a home, regularly purchasing a new wardrobe, or paying for groceries.
Trusts are extremely flexible and almost all provisions will be upheld unless they violate a law or require someone to behave in a way that is considered contrary to public policy. An additional benefit of using a trust is that you aren't limited to gifting stock. If the trust is well-written, you can later contribute other investments—including bonds, shares of mutual funds, real estate, and more.