Lifetime gifting is a powerful tool for individuals looking to support loved ones, contribute to philanthropic causes, or manage their assets effectively. Under common law, a gift is considered valid if:
- Intent: The donor must have a clear intention to make a gift.
- Delivery: The property must be effectively delivered to the recipient, known as the donee.
- Acceptance: The donee must accept the gift.
People are motivated to make lifetime gifts for various reasons, including expressing affection, providing financial assistance, engaging in asset protection planning, or supporting charitable organizations. While many donors are driven by non-tax considerations, structuring the gift to optimize tax benefits is also common. This article will explore both the tax and non-tax aspects of lifetime gifts, focusing on outright gifts, gifts under the Massachusetts Uniform Transfers to Minors Act (UTMA), and gifts in trust, including inter vivos qualified terminable interest property (QTIP) trusts and trusts for children.
Types of Lifetime Transfers
(a) Outright Gifts
Outright gifts are the simplest form of gifting. In this scenario, the donor transfers property to the donee without any conditions or restrictions. Once the gift is made, the donor relinquishes any legal control over the property, which becomes fully accessible to the donee and their creditors.
(b) Gifts Under the Massachusetts Uniform Transfers to Minors Act (UTMA)
Since minors cannot legally own property in Massachusetts, the UTMA (G.L. c. 201A, §§ 1-24) allows a custodian to manage assets on behalf of a minor without the need for a formal trust or court supervision. This provision simplifies the process of transferring assets to minors while ensuring that the property is managed appropriately until the minor reaches adulthood.
(c) Gifts in Trust
Gifting in trust provides an alternative to outright transfers. In this arrangement, a trustee holds legal title to the trust assets and manages them according to the terms outlined in the trust document. Irrevocable trusts are designed such that the grantor cannot revoke them; however, these trusts can still be modified under certain conditions. Notably, Massachusetts law has shifted the default rule: a trust created after July 8, 2012, is revocable unless explicitly stated otherwise (Massachusetts Uniform Trust Code (MUTC), G.L. c. 203E, § 602(a)). While irrevocable trusts can offer significant benefits, such as removing assets from the grantor’s estate for tax purposes and shielding future appreciation from estate taxes, they must be carefully structured to avoid unintended consequences or adverse tax implications.
Disadvantages of Lifetime Transfers
Despite their advantages, lifetime gifts come with notable disadvantages. One key drawback is that once property is gifted, it is no longer available to support the donor. For example, if a donor gifts property to a spouse with the expectation that it will benefit the family unit, the property remains with the donee spouse if the couple divorces. This means the donor loses access to the gifted property, which could be problematic if future financial or personal circumstances change.
Considerations Before Making Gifts
Before making substantial lifetime gifts, donors should thoroughly assess their financial situation with their advisors. It is crucial to understand that once the property is gifted, it is permanently relinquished. Donors should also consider potential future changes in their financial or marital status that might necessitate reclaiming the gifted assets. Advising clients to document this advice in writing can help mitigate risks. This approach is particularly useful for individuals who wish to plan their estate by setting aside assets for future generations while retaining control over their current financial resources.
In summary, lifetime gifts can serve various purposes and offer significant benefits, both emotional and financial. However, careful consideration and planning are essential to ensure that these gifts align with the donor’s long-term goals and financial security. If you would like to speak with an attorney about gifting, contact my office by calling (781) 761-2148 to schedule a free consultation.
