Wealth Planning News

Vol. III, No. 3

Problems of Outright Gifts

A couple made their oldest son the owner of a large insurance policy on their lives. The son was mature, trustworthy, and a successful dentist. He was told to name himself and his siblings as policy beneficiaries, which he did. All went well for several years.

Years later the son's wife divorced him. As part of the divorce settlement he had to pay his wife over $60,000 for her share of the "growth" in the cash value of the policy over and above the gifts that had been made to him to pay policy premiums. Mom and dad had to make up the deficiency by more gifts. In essence their former daughter-in-law received a larger part of the gifts they had wanted to make for the benefit of only their own children.

Outright gifts can cause future problems. The dentist could have been sued and could have lost all of the cash value of the insurance policy, which would have taken all of the gifts made by our couple.

There are even more risks where outright gifts are made to descendants with no direction as to how the gifts are to be used. Here is a summary of some issues related to outright versus trust gifts:

Risks and Benefits Compared

Trusts Solve The Problems

 

The solution to the potential problems of outright gifts is some advance planning to develop goals. Goals should normally include the following:

1. Helping the recipients to not become dependent on gifts, and instead encouraging them to develop their own careers for basic support and worthwhile lives.

2. Giving the recipients the dignity of control after you are sure you want to give up control over two basic things: The manner in which gifts are invested and the timing and manner in which income and principal are distributed to loved ones.

3. Sometimes a goal is to be sure you have legal access to funds gifted, for your own possible future needs or future needs of a surviving spouse. 

4. Protection of gifts and investment growth from loss to anyone who might sue your loved ones in the future.

5. Protection of gifts and investment growth from loss by your loved ones in a divorce happy society.

6. Protection of gifts from all transfer taxes for as many years as the law allows, which is easily a century or longer.

Meeting these goals requires the use of gifting trusts of various kinds.

Call us for a free consultation about gifting techniques.

Copyright 2021 Hopp & Associates, PC