Risk with gifting to Children

[morestout]

I'm happy to seek proper legal advice on what is probably a complicated subject but would appreciate any initial thoughts to point me in the right direction.
I have gifted some money to my children that has been invested in ISAs and has done well. We have a general agreement that,if necessary, they will help me a bit financially in my old age and we have joked about me taking the money back if they marry someone I don't approve of. Is there anything I can actually do to protect this and any future gifts as I'm not going to be best pleased if a future divorce results in half my hard earned savings disappearing off with their ex-partner. Thank you.

[scrumpyjack]

I'm not a lawyer but the obvious answer to your question is that a gift with reservation is ineffective for IHT purposes.

If the gifts are without reservation then the money now belongs absolutely to your children and is subject to the vagaries of their lives and the choices they make.

If you want to be able to reclaim the money and insulate it from future divorces, it might be better to make documented interest free loans repayable on demand. That way you can reclaim it at any time and in a divorce it is a liability in calculating your child's net assets.

[Lootman]

I think it depends why you are making these gifts.

If the idea is to mitigate inheritance tax by making potentially exempt transfers then it is important not to reserve any benefit from the gifts. It's possible that a promise or agreement to repay the money later could be construed as meaning that it wasn't really a gift at all, but rather some kind of loan, and then the value of the gifts might be deemed to be still part of your estate for IHT purposes.

So if you are going to have an agreement like that, then keep it oral only and make sure the kids know that.

On the other hand if you just want to help them out then I don't think the details matter so much, although it's always possible that when you need the money they don't have it because they spent it.

The other way to handle this is via some kind of trust, which could also cater for the "bad spouse" risk. But I will defer to others on that topic as it is beyond my pay grade.

[Clitheroekid]

As has been said, the obvious solution is to classify the transfer of money as a (presumably interest-free) loan repayable on demand rather than a gift. The only documentation needed is a simple promissory note, signed by your child.

However, if you're happy with this you need to recognise that the loan will be counted as an asset when you drop off your perch. If you're married at the drop date then the loan will pass to your spouse without any IHT being payable. However, it will then become part of her estate, and that will be subject to IHT when she dies (unless she's married again).

If your spouse dies first then your estate will (assuming you remain single) be taxable, and it may therefore be sensible to calculate whether there would in practice be any IHT to be paid. If you're reasonably confident that the exemptions and allowances will mean there's no IHT payable then you're OK.

However, if there probably will be IHT to pay you have to weigh up the desirability of being able to recover the money against the 40% IHT that it's likely to incur.

And on a purely practical note, unless you secure the loan in some way there's a high chance it will have been spent by the time you want it, so that your child may be unable to repay it without difficulty or at all. In any event, even if they could repay it but simply refused to do so could you really contemplate the prospect of suing your own child?

The more elaborate solution would be to set up a trust of some sort, whereby the trustees had discretion whether or not to give or lend money in the trust fund to your children. However, this is an expensive option, and the expense may well be disproportionate to the perceived risks. If you did want to go down that route you would need proper professional advice, which is expensive.

[PinkDalek]

As has been said, the obvious solution is to classify the transfer of money as a (presumably interest-free) loan repayable on demand rather than a gift. The only documentation needed is a simple promissory note, signed by your child. ...

I imagine others will contribute further but I think you are talking about any potential future loans, rather than those gifts that have already been made (but see below).

On the latter it might be of help to know when those gifts were made and, if they are to be reclassified as iflrods, what form or wording would be appropriate.

[didds]

So if you are going to have an agreement like that, then keep it oral only and make sure the kids know that.

IANAL etc either

wouldn't that however be meaningless if any such gifts ended up as part of a divorce settlement, as there is no evidence that "the arrangement" was in place. assuming the gift still existed of course! but even if it wasn't the repayment if requested would come out of post-divorce resources etc (I accept this is an extreme example)

I'm not suggesting Lootman's idea is wrong - just that if push comes to shove it may not achieve what is wanted.

happy to be wrong

didds

[Lootman]

So if you are going to have an agreement like that, then keep it oral only and make sure the kids know that.

wouldn't that however be meaningless if any such gifts ended up as part of a divorce settlement, as there is no evidence that "the arrangement" was in place. assuming the gift still existed of course! but even if it wasn't the repayment if requested would come out of post-divorce resources etc (I accept this is an extreme example)

It's a dilemma. What's effective for potentially reducing IHT may carry more risk in the event of the gift recipient getting divorced. Morestout never mentioned IHT but did mention spousal risk so perhaps that is a clue.

Of course the transfer could be documented in both forms - one as an outright gift and one as a loan. Then, later, if it is advantageous for it to be deemed one or the other, and the parties all agree, then the inconvenient document could be destroyed and the other one presented.

But of course everyone would have to get their stories straight or things could go sideways rapidly.

[vrdiver]

Is there anything I can actually do to protect this and any future gifts as I'm not going to be best pleased if a future divorce results in half my hard earned savings disappearing off with their ex-partner. Thank you.

It's an interesting dilemma; one that has taxed my own thoughts for similar reasons (the previous Mrs VRD departing shortly after I inherited the equivalent of about a year's pay has made me aware it can indeed happen!)

Back to the present day and I have decided I cannot control outcomes for future generations: how long should such an injunction last? If they divorce after 50 years having raised 12 kids, would it still apply? If not, then where should I draw the line? Perhaps a "taper relief" should be baked in, but would that seem like I'm trying to bribe the spouse to stay?

In the end, it was a sit-down conversation: I expressed my "worries" and got two different responses:
a) I'm married - if you don't like it keep your $!*@"ing money, and
b) Fair point - I'll put it in the pre-nup.

Ultimately it's down to them how they choose to share. In both my marriages we've gone the "everything is ours" route, rather than the "his 'n' hers" division. If you explain your concerns, I don't think you can do more without potentially creating a rift in their own relationship with their partner, which is something you may not have intended.

Alternatively, tell them that in the event of an imminent divorce, they should gift you the money back pronto!

VRD

[didds]

Alternatively, tell them that in the event of an imminent divorce, they should gift you the money back pronto!
VRD

presumably again presumably a non starter... otherwise anybody getting doivorced could sudden;ly offload houses, cars, jewelrry, and cash etc etc to a trusted other party so that they didn't end up as an asset for divvying up.

then after the divorce just get them all back.

??

didds

[morestout]

Thanks for the responses. There is a potential IHT problem and my wife passed away a year ago which has reawakened my interest in this issue. No real knowledge of prenups but presumably the parties to the marriage agree that in a divorce certain assets are ring fenced from the settlement as they revert to my son or daughter or can they revert to me if I gifted them . Can't say I'd be looking forward to the conversation with my potential in law but at least they are starting off in a much better position than they would have without my help.

[dspp]

No real knowledge of prenups but presumably the parties to the marriage agree that in a divorce certain assets are ring fenced from the settlement .

From my experience pre-nups can be very helpful:

1. Prenups are taken into account by the courts in divorces in the UK, or more specifically in E&W.
2. It is important that the less powerful spouse is under no coercion and of sound mind when negotiating them, and signing. So doing so whilst pregnant, or in the situation of a significant power imbalance in the relationship is a no-no (or at least creates possibility of court not putting any weight on them).
3. Both parties should get, and document that they have had, independent legal advice; and both parties should keep copies of this re the other in case it mysteriously goes astray.

Given the numbers of lurkers who take notes, it seems very sensible to have these conversations with children from fairly early years if at all possible. That reduces the possibility of the more obvious dangers.

regards, dspp

[Clitheroekid]

Of course the transfer could be documented in both forms - one as an outright gift and one as a loan. Then, later, if it is advantageous for it to be deemed one or the other, and the parties all agree, then the inconvenient document could be destroyed and the other one presented.

The key words are "... and the parties all agree...".

This is exactly the sort of scenario where the parties may very well end up disagreeing. Situations like this can very easily end up in court, where sworn evidence would have to be given. Most people are not willing to give false evidence on oath (and those who are generally make such a fist of it that they may as well have told the truth!)

And even if the situation doesn't lead to litigation the executors are going to have to give sworn evidence that the transfer is either included in or excluded from the estate. If they have knowledge of the situation (which they are likely to) and they deliberately file an application for probate that they know is materially inaccurate they are committing perjury, which can earn them a sentence of up to 7 years.

Alternatively, tell them that in the event of an imminent divorce, they should gift you the money back pronto!

The courts are not naive. They are well aware of the fact that divorcing spouses will try to get rid of assets, just as people facing insolvency do.

There is therefore included in the Matrimonial Causes Act 1973 the well known section 37. As well as enabling the court to issue an order which freezes the other spouse's assets they can - and often do - also make orders requiring assets that have been given away (as in this scenario) or transferred out of the jurisdiction to be returned.

[Lootman]

Of course the transfer could be documented in both forms - one as an outright gift and one as a loan. Then, later, if it is advantageous for it to be deemed one or the other, and the parties all agree, then the inconvenient document could be destroyed and the other one presented.

The key words are "... and the parties all agree...". This is exactly the sort of scenario where the parties may very well end up disagreeing.

That depends on who the parties are. If it is just me and my beneficiary then what I say won't matter any more because I will be dead and unable to testify. And it is unlikely that my sole beneficiary is going to say something that will disadvantage him or her.

Of course, on the other hand, if my son told his soon-to-be ex-wife of this arrangement then the situation changes dramatically, because she becomes a party with knowledge.

As to your more general points about lying, I have to say that my experience is different. My brother-in-law is a lawyer and he tells me that he has never met a case where somebody didn't lie. How good people are at lying is a valid concern, but i have to say that some of us are very very good at lying. Without prejudice I will state that i have lied under oath a few times, for what i felt were very good reasons, and nobody rumbled me.

But as my father would always say to me, "if you are going to lie, make sure you have a good memory".

That said, overall it would be better if those who wrote laws did not give us massive incentives to lie.

[chas49]

Moderator Message:
Just as a general observation, please take care when posting something which might be interpreted as advising a course of action which might be seen to be unlawful or illegal. I do recognise that it is realistic to accept that certain actions are available to people, but TLF cannot be seen to advocate illegality. (chas49)

[Lootman]

Moderator Message:
Just as a general observation, please take care when posting something which might be interpreted as advising a course of action which might be seen to be unlawful or illegal. I do recognise that it is realistic to accept that certain actions are available to people, but TLF cannot be seen to advocate illegality. (chas49)

I would agree that illegal acts should not be actively proposed or supported. If someone comes on here asking how to murder his wife and get away with it, that's bad.

But there has to be a place for discussing risk management and the assessment of various courses of action. In other words, if someone suggests a course of action that some might deem to be contrary to the law, then it is reasonabale to discuss the pros and cons of such an assessment.

As Clariman said in a different context today, the risk of making comments here, as with copyright, mostly falls on the contributor and not the site.

[Howard]

Mrs H and I were in the same situation as you, Morestout. We gave our children substantial gifts. We took the risk of divorces, squandering of assets etc. and made no conditions.

In our experience this has proved very positive. Our relationships with our children and their spouses have been most rewarding. Especially now we have grandchildren. Who knows, it may be that our gifts were a factor.

Now more than seven years later, it looks like a very good decision and, of course, unlike complicated legal agreements it involved no extra costs.

regards

Howard

[Mike88]

I gifted a large sum of money to my son in order to buy a property after he got married. Three children later they got divorced and she has the house so beware. At the time I recall wanting to protect my investment with various conditions or even make the money a loan but my wife said I was being controlling and I suppose she had a point but I now wish I hadn't listened.

[Chrysalis]

But presumably it is your grandchidren who are living in the house?

[Mike88]

But presumably it is your grandchidren who are living in the house?

Wife has children 4 nights a week my son 3 nights. My son lives in rented accommodation while the ex wife has the family home which she is about to share with her new partner.