Gifting as a wealth transfer option

Ants and bees are diligent, disciplined workers who work to a plan. They work very hard to accumulate food so that the entire colony is well fed and sustained. They will have food for a while even if there is a disruption in the food supply due to adverse weather conditions, non-availability of food at a certain point, etc. They plan well anticipating the vagaries of nature. Their discipline, diligence in execution along with contingency planning is worthy of emulation.

We humans too save and invest for our future needs and for wealth creation. In many cases, there is a good amount of wealth created over time, that is left over even after the planned goals are achieved.

We all want to pass on a legacy to our loved ones. Many others also donate money for causes they care for.

When we hear the word legacy, we typically think of a Will. Will is a good wealth transfer mechanism to the beneficiaries, after the lifetime of the Will writer ( Testator ). It is very easy to create a will. But the Will comes into effect after the lifetime of the person. The Testator can only hope that everything goes well. Also, the wealth just gets transferred to the beneficiaries and there is no control over what they do with it.

Trust is also used as a wealth transfer tool, to take care of most of the problems in a Will. Here, the Trust can be created and operationalised during the lifetime of the Creator of the Trust (Settler). Also, how the Trust funds needs to be used, in what circumstances and for whose benefit can be totally controlled. This is very useful specially to provide for someone vulnerable, like a special child, a spouse or other relatives and even protect the wealth from potential predators. However, a Trust is costlier to create and administer.

These are the commonly used methods of wealth transfer. Sometimes, apart from a legacy to relatives and others, assets are also given out for philanthropy, for causes that are close to their heart too.

The other wealth transfer option is gifting, which is not used very often. There is a reason for that. When something is gifted, it is a one-way street; once gifted it is another person’s property. Hence, many fear gifting their immovable assets and even financial assets, during their lifetime.

If there are these problems, why gift at all? There is a reason.

Person’s life cycle – Let us look at the typical life cycle of a person. When a person joins the workforce, the income is small. But there are many aspirations and goals at that time. So, they are in constant need of money, which is in short supply for them.

The same person may be earning quite well when s/he reach their forties and fifties and may have enough money for whatever they may want to spend on.

If they get a legacy when they are near retirement, it will add to their wealth. However, it is not going to be too very useful, when they have themselves accumulated decent wealth.

Had they got even a portion of the legacy when they were young and struggling to take care of their various needs, it would have been useful.

So, is gifting a good option to help the next generation – There is no straight answer to this. Giving something when one is truly in need, makes the gift extremely valuable.

Parents routinely advance money to children (even those that are working ) for various goals like education, car, home, even vacations… We have also seen children gifting money to parents – by way of a home for them, a good corpus, a generous monthly income etc.

However, before gifting, one needs to understand that they too have requirements and goals which they need to provide for. They need to estimate how much they can give without jeopardising their own goals. It is a tight rope walk.

Problems with gifting – Many times it is rather difficult to estimate what may be required in the future. Most people don’t even think in that direction before gifting. They work with their heart.

While gifting, the gifted amount or asset will permanently flow out of one’s corpus. One needs to keep this in mind.

Let us take the case of children gifting to their parents rather generously. In this situation, the surplus money they have advanced (lumpsum or on a monthly basis) may have got invested. But after the parents’ lifetime, it will go to all siblings, if a clear will is not in place to pass back the money that the son/daughter had generously advanced, which will be unfortunate and unfair for the donor.

If the parents advance a good sum of money to their wards and they come up short later in their lives, they will be at the mercy of their children. That is not desirable too.

Are we confusing duties with gifts here? – There need be no confusion here. A parent may have a duty to ensure good education to their children and ensure their needs are met during their growing up years. Or they may even help when their children are going through a rough patch.

But it is not the duty of the parents to ensure that their children have a house or car of their own. They need not have to fund any lifestyle goals like vacations or lofty spending. It is in these situations that one needs to use discretion while using the gifting option.

When to gift? – Gifting is a discretionary exercise and beyond the call of duty. Hence, it is one’s prerogative to gift or not to gift…and if one does gift, how much to gift.

The general rule is to ensure that the amounts or assets sought to be gifted would not materially affect the donor, after the event. If this is satisfied, one may gift.

As a general rule, targeted gifting to children early in life especially for something worthwhile is positive. For instance, giving a gift to enable further education or for part funding a home would be very useful.

It is a good idea to gift smaller amounts for targeted purposes, over time. Else, there is always a possibility of the recipient using the gift amount for funding lavish lifestyles, when substantial gifts are made.

Will gifts kill initiative? – Yes, it can. It is good for parents to allow children to learn life lessons through experience, instead of providing them crutches beyond the years when children complete college.

If parents keep pampering children by giving access to their money and a good living, they are doing irreparable damage. In this kind of a situation, they are robbing them of their initiative and drive to apply themselves and do well. Beyond a point, children may be much better off in their lives without an unlimited money conveyor!

That is why some billionaires have pledged to give off everything except for a few millions to family members. They understand this concept very well!

On the whole, gifting is a great option and should be used with discretion. Gift ensures money availability when it is needed most. What is the use of money that adds to an already big wealth pool, at one’s old age? Gift should be a present, in the present, when it is needed!