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When a Gift Isn't

As part of a lifetime financial and/or estate plan, many clients incorporate gifts to family members. Clients often like to see the recipients of those gifts welcome and use the gifts, something the client an only anticipate when the gifts are made after death. However, lifetime gifts do not always work out the way clients intend or understand.

Obviously, if a gift is made and the recipient fails to acknowledge or appreciate it, the client will not have gotten much satisfaction. Likewise if a money gift is quickly dissipated on uses the client does not approve, the gift may be seen as unsuccessful. To avoid some of these issues, clients often want to keep some control over the gift and that, in turn, can create other problems.

One recent example involved a client who created and funded an irrevocable trust for the benefit of his children, one of whom was named trustee. The trust appropriately stated that the client gave up all right and control to the assets in the trust – a necessary prerequisite to it being a completed gift. However, in practice, the client directed the trustee when distributions could be made to any of the children and also instructed the trustee to not make distributions to one of the children. That negates the gift and could cause the family a great deal of trouble ahead.

Another client wanted to provide for her husband in the event she died first. Instead of making a gift, the client funded a revocable trust that provided for distribution to the husband in the event he survived the client while they were still married. This approach works well since the existence of the trust and its provisions can be made known to the husband – allowing for lifetime appreciation by both he and the client – while the trust itself can be amended at any time by the client to allow for changing circumstances. There is control and no present gift – no trouble.

Real problems may arise where a client makes gifts he or she cannot afford and where control is gone as it would be in a true completed gift. Poor advice from an attorney led a client to place substantial assets in irrevocable trusts, leaving the client without sufficient resources to weather the great recession and causing a great deal of financial pain. Honoring the gifts – as he should – was proper but led to a poor result for him and could also lead to issues with family relationships.

The point of this post and these examples is that calling a transaction a gift doesn’t necessarily make it so and actually making a completed gift may result in unexpected difficulties in the future. Any significant gift should be thought out and thoroughly planned BEFORE it is done. Talk to a trusted adviser first. 

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