How to Buy Stocks for Grandchildren

Many investors seek ways to efficiently transfer their wealth to their heirs while they are still alive. This article shows you how you can purchase stocks for your grandchildren.

Open a custodial account for each grandchild for whom you want to buy stock. This will be either an UGMA or an UTMA account, depending upon the state you live in. You must open a separate account for each child before you can gift the child with stock or cash.

Put the stock in a trust account as another alternative with your grandchildren as beneficiaries. You can open a separate trust for each child, or perhaps a single trust with all of them as co-beneficiaries. Or you could create a family limited partnership and make each of them limited partners, where they are entitled to their share of the partnership but have no authority to make transactions.

Remember the gift tax rules when donating stock or cash to your grandchildren's accounts, regardless of the type of account you use. Any amount over $12,000 per child per year will count as a taxable gift, and you must either pay gift tax on this amount or reduce your unified credit by the excess.

Purchase the stock once the cash is in the account, either through a broker or directly online. Although there are no restrictions on the stocks you can use, it is wise to choose stocks that have solid growth histories over time.

Remember the "Kiddie Tax" rule if you hold the stock in a taxable account. This rule taxes all dividend or other current income generated by investments in the account over a certain dollar limit at your highest marginal tax rate.