12 Jun What you can do about misused money gifts

Q. When my son got married, we gave him and his new wife $20,000 to pay for the wedding. We just learned they had the whole wedding paid for by her parents, and they used our money to buy a new car. We’re not sure how we feel about this, and it’s changing our plans to gift them money every year to lower our estate. How should we handle this?
— Dad

A. Ouch. Gifting money to family can be a rewarding experience, but if your children don’t make smart money decisions, the gifts can lead to some hard feelings on your part.

Let’s talk about your options and what you can do to eliminate future problems.

For starters, individuals can gift up to $14,000 per recipient for 2017, or $28,000 a year can be given by married couples, without triggering a taxable event, said Charles Pawlik, a certified financial planner and chartered financial analyst with Beacon Trust in Morristown.

Going beyond that amount would mean you’d have to use a portion of the lifetime gift tax exemption, which is $5.49 million per person for 2017, he said.

“Although outright gifts can potentially be a simple way to both reduce your taxable estate as well as benefit family members, this simplicity can come at a cost,” Pawlik said. “Adult children often don’t have the knowledge, context or maturity to make responsible decisions around significant/ongoing sums of money that are gifted to them.”

In addition to the lack of control that you have over how the funds are used, outright gifts may also present a challenge for a newly married couple in terms of any philosophical differences around spending and finances that they may have, Pawlik said. It can also potentially expose those funds to the claims of creditors, Pawlik said.

You do have alternatives to accomplish the goals of reducing your taxable estate, helping your family members and making sure the funds are used in a way you can live with.

“Aside from having direct communications around the intended use for any gifts that you make, establishing and funding a trust with what would otherwise have been outright gifts may be a sound way to address your concerns and accomplish your objectives,” Pawlik said.

He said the trust can be established and funded during your lifetime. This would be called an inter-vivos trust.

An irrevocable inter-vivos trust to which an initial sum can be contributed and/or annual gifts can be made for the benefit of family members can have several benefits compared to outright gifts, Pawlik said.

“A trust allows you to control how much in the way of funds gets distributed to the beneficiaries of the trust, the timing for those distributions, as well as for what purposes the funds may be utilized,” he said.

These types of trusts can remove assets from your taxable estate and provide asset protection benefits so the funds are not available to the claims of creditors, he said.

Pawlik said you can name an individual trustee, a corporate trustee — such as a trust company with dedicated trust officers — or both to ensure that the provisions of the trust are carried out in an objective fashion and in line with what you intended.

“In addition, with assets placed in trust that are controlled and managed by an independent trustee, the onus is off of the beneficiary and the beneficiary’s spouse as far as any potential disagreements relative to how and when those assets should be utilized,” Pawlik said. “This will be spelled out in the provisions of the trust document, and the trustee(s) will be legally required to adhere to those provisions.”

Assets in trust also avoid probate, which can ultimately allow for a faster process in distributing assets to heirs when you pass away, and add a layer of privacy that is not present when assets are probated by will, which is a matter of public record, Pawlik said.

Although there can be a level of added complexity and cost when using a trust compared to making outright gifts, the associated benefits can be well worth it, Pawlik said.

You should consider meeting with a certified financial planner and an estate planning attorney. These pros can help you understand all of your options, taking into consideration your overall financial situation and helping to determine the long-term impact of making ongoing gifts.

Good luck!

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This post was first published in June 2017.