The topic of gifting assets will undoubtedly come up over the course of providing estate planning advice to clients -- whether the reasons are primarily tax-driven or simply to help out loved ones.

While gifting can have significant benefits, not every client will be in favor of it, no matter how many good reasons exist to make it part of their financial plan.  Here are four key questions you can ask your clients to help them determine whether gifting is right for them.

1. Do Your Clients Feel Financially Secure?

While this may seem obvious, it's important to discuss with clients that gifting involves giving away assets and, ultimately, the loss of the use and benefit of the property. In order to participate in gifting, clients must believe that, from a financial perspective, they can live their lives on a daily basis without the use of the property or the income that will be generated from it.  They must also believe that their financial futures will be secure without the property.

Over the years, I have learned that the definition of financial security can vary widely among clients. I have had clients tell me that $1 million of assets is more than they will ever need and they want to give away the rest. I have also had clients tell me they could not maintain their lifestyles with less than $20 million of assets.

It's all relative, and it varies drastically from client to client.  Simply put, if a client feels they cannot live without the asset, they should not give it away -- even if doing so makes sense for a variety of other reasons, such as tax savings.

2. Can Your Clients Tolerate Complex Solutions?

Gifting can be as easy as writing a check or as complex as requiring multiple irrevocable trusts, limited liability companies, appraisals, deeds and other various legal documents. All of this can be very expensive in terms of the legal, accounting and other professional fees that are necessary to set up and maintain on an annual basis. These administrative burdens of gifting can dissuade clients from going through with a complex gifting transaction.

Not only can all of these entities be a lot to organize, but some clients just do not have a tolerance for the complexity. Before entering into any type of gifting transaction with a client, it is absolutely necessary to disclose all the administrative burdens and annual costs so there are no surprises to your client in the future.

3. Do Potential Gift Recipients Have ... Issues?

In a previous post, Estate Plan Design: 5 Key Questions for Clients, I wrote about how trusts can help clients plan to leave assets for loved ones with "issues" -- such as addiction, mental illness or just being bad with money. These same issues can hinder gifting too.

Over the years, clients have told me that they did not want to gift because:

  • The intended recipient had already been given enough.
  • The intended recipient had "issues" and they did not feel comfortable gifting to them
  • They did not feel appreciated by the intended recipient
  • They simply did not like the intended recipient at that particular moment in time. (This last reason is common when dealing with clients who have teenage children.)

Regardless, it's important to explore all these reasons with your clients to determine whether or not the intended recipient is the right recipient.
4. Can Clients Live With the Outcome?

Some types of gifting will have outcomes a client finds distasteful.

One example: A tried and true way to give away a primary residence or a vacation home is to use a Qualified Personal Residence Trust (also known as a QPRT). However, at the successful termination of the QPRT, the clients must pay rent if they want to continue to use the home.

Many clients dislike this; they do not want to pay rent to use what they still view as their own home. So it's important to explain to clients what things will look like when the gifting transaction is over, in order to ensure they fully understand the outcome -- and, more important, can live with it.

Estate planning attorney Tracy Craig is partner at Mirick O'Connell and chairwoman of the firm’s trusts and estates group.

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