Individuals of any age may own stocks. Even a newborn baby can be an investor in the stock market if someone makes a gift of stock certificates as a baby present. Those persons under the age of 18 in the U.S. are required to share the title of any investment accounts with their parent or legal guardian.
Tip
A person of any age can own stock, even a minor child. But before the age of majority, a minor child’s parent or legal guardian retains control over the assets by making the trading decisions.
Stock Investment for Children
Common stock, preferred stock and real estate investment trust shares are sometimes inherited by children after the death of a family member. In this situation, it is legal for a child of any age to own the physical stock certificates in his name. If the stock is to be deposited into a U.S. investment account, the child’s legal guardian has to open and operate the account on behalf of the minor. There are two standard methods for a parent or legal guardian to open an investment account with the name of a child under the age of 18.
Guardian Stock Accounts
A guardian account is a stock and investment account in the name of the legal guardian with the minor’s name attached. All legal ownership and title to any equities or funds in the account are assigned to the guardian, who is of legal age. In a guardian account, the parent or legal individual has total control over the assets and trading of the account. All tax liabilities and possible future capital gains earned on the investments are also assigned to the adult.
Should the parent or guardian listed on the account die, the asset would pass directly to the child. As long as the guardian adult is alive, the child has no legal standing or right to the funds.
Custodial Stock Accounts
A custodial account also has the child’s name and the name of an adult, parent or legal guardian attached. However, in this case, it is the child who holds actual legal title to the assets. The custodial account only grants the adult legal control of the investment decisions and no legal ownership. This includes any withdrawal of funds made by the custodian, for any reason.
As a legal owner of the investment, the child is responsible for any taxes or capital gains that are created through the investments. In past decades, young children in the United States almost always paid less tax than their parents. During this period of time, wealthy families at times operated custodial accounts on behalf of their children to shift tax liabilities into the child’s name. Substantial changes to the U.S. tax code in 1986 and 2006, which became known as the “kiddie tax,” reduced this type of activity.
Because of the legal protocol surrounding a child’s ownership of stock, you may want to consult a licensed tax professional before engaging in any investment on behalf of a minor.
Long-Term Stock Performance
Over the last 30 years, U.S. stocks have performed better than money market funds, municipal bonds, certificates of deposit and short-term bank deposits, which makes buying stock for a child a potentially lucrative way to invest long-term funds. Typically the child won’t have access to the funds for 10 or 15 years, during which time the child’s investments can multiply. This term is long enough for the stock market to move through any short-term cycles, allowing the child’s investment to experience long-term growth.
Paper Stock Certificate Safekeeping
In today’s digital age, paper stock certificates are becoming a thing of the past. But when a child owns physical stock certificates, the child’s parent or legal guardian may want to hold the certificates in a bank lock box or safe.