NEW YORK -- When Gladys Graham's two children were young, she complemented their usual birthday and holiday presents with stocks.

Her gifts helped build two portfolios that grew to about $10,000 each, giving her son, Jerry, and daughter, Iris, some savings during their college years.

"When they got [monetary] presents for their birthday or checks for the holidays, that would go into the [brokerage] account," said Graham, a high school guidance counselor from Staten Island, N.Y.

Graham is among the ranks of people adding stocks, bonds and mutual funds to their gift lists for children, boosting the next generation's wealth and knowledge of financial markets.

Sales of investments as gifts for children tend to increase during the holidays, bankers say. "We definitely see an increase in the number of custodial accounts that we open between Thanksgiving and Christmas," said John Leahy, a regional manager for the New York metropolitan area for Quick & Reilly Inc., a division of Fleet Financial Group.

Through accounts opened under the Uniform Gifts to Minors Act and Uniform Trusts for Minors Act, gift-givers can contribute up to $10,000 a year tax free.

When the recipient reaches the age of adulthood, which differs from state to state, he or she can access the funds.

Graham said she knows of cases where recipients have spent their money in one shot, traveling across the country, for example. "You have no control over how they spend," she said.

In addition to these accounts are Education IRAs, in which the maximum contribution is $500 a year per account.

The education IRA, which was established this year, can be used for tuition, room and board, fees or books. The recipient of the account avoids taxes on the original contribution and on the returns as long as he or she withdraws the money before the age of 30.

Contributors to these IRAs can't claim federal income tax deductions on their gifts.

Jim Chapman, a student at the University of Virginia's Darden Business School, established such an account for his nephew, Will Miksovic, 2, his sister's third child. "I'm a third child, too, and thought it'd be a good idea," he said.

Banks, brokerage firms, and mutual fund companies all will help set up such trusts. Fees for establishing these accounts are usually small or nonexistent because the banks and brokerage firms earn commissions when they buy and sell stocks for the trusts, said Quick & Reilly's Leahy.

One of the drawbacks of giving financial products for children in a restricted account is that such gifts aren't immediately accessible and can't be unwrapped like a baseball or a doll. In addition, adulthood can seem pretty far off to a child.

Laura Smith, who works at a stock trading firm in New Jersey, set up accounts for her niece and nephews, aged 3 to 10. Smith said her sister, the children's mother, doesn't want them to know about their account balances until they come of age.

Yet, other gift givers try to involve the recipients by picking stocks that might interest children, bankers say.

"People like to put money into something of interest to the family," said Leahy of Quick & Reilly. Families that enjoy computer games might buy stock in the Learning Co., a top educational software maker, which has gained 53 percent this year. Fast-food fanciers might buy stock in McDonald's Corp., which is up almost 47 percent this year.

A popular pick for these trusts is Walt Disney Co., bankers say, because of its well-known animated characters -- many of which are sprinkled throughout the company's annual reports.

"A lot of my friends have Disney," said Holly Isdale, a vice president and U.S. income tax strategist for private clients at J. P. Morgan & Co. in New York. "The annual report with the '101 Dalmations' is a big hit. Even the dividend checks can be fun."

While Disney's stock is down about 7 percent this year, it has climbed more than 120 percent in the past five years.

Jerry Graham, who is 25 and works for Group Sales, a Manhattan-based provider of group tickets to Broadway shows, said his mother bought him Kmart Corp. stock when he was young.

"That was interesting to me, because I could relate to it," he said. "When you buy this toy at Kmart, you're helping them to grow."

In addition to the educational opportunities for children, those who choose stocks as gifts get to watch them rise or fall in value.

Pub Date: 12/20/98