Morgan Stanley estate planning expert: 5 tips for advisors on gifting

February 6, 2023 7:21 PM

Present with red ribbon. Black father giving gift package to daughter

The best thing your clients can gift their family members is love, of course.

But when it comes to passing down the hard assets, things can get tricky — especially if clients are wealthier.

While less affluent people might simply leave a pool of money to a surviving spouse or split it among children, wealth creates more hurdles. There are more tangible assets, in the form of possessions, to divvy up and potentially more tax issues to dance around.

Nicolas Tavormina, the head of wealth and estate planning strategists at Morgan Stanley Private Wealth Management.

An estate plan for such individuals also has to take multiple heirs and even potential heirs-to-be into consideration.

"Obviously you want [estate plans] to be flexible so that they can adjust to whatever happens in the family when you are alive," Nicolas Tavormina, the head of the wealth and estate planning strategists team at Morgan Stanley's Private Wealth Management Division, said in an interview.

But sometimes those plans should be less flexible, for instance in the case of families where a surviving spouse might remarry and have more children.

"You want to leave certainty that the bulk of the assets that belong to you are going to be received by the beneficiaries you really want to have it," Tavormina said.

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Emotionally, logistically and legally, there are many common pitfalls for advisors who have high net worth and ultrahigh net worth individuals trying to fit gifts into their estate plans.

Here are five things to look out for in your practice when it comes to gifting, according to Tavormina.

Timing it right

Part of effective gifting is the timing of the present. Thus, the question of "when" is often first for Tavormina when talking to clients.

"Do you want to do it in your lifetime? Do you want it upon your death? Upon the death of the second spouse?" Tavormina said.

For ultrahigh net worth clients, it can be tempting to jump on the ticking clock of the current gift tax exemption, which allows individuals to gift up to $12.92 million and married couples to gift up to $25.84 million in their lifetimes without incurring taxes. That deal is set to expire or "sunset" at the end of 2025, when the limit falls back down to around only $5 million per individual, adjusted for inflation.

Many ultrarich clients are itching to stuff more assets into tax-exempt trusts before that deadline.

"What I usually recommend to clients is, never put the planning and eventually the exclusion amount before their wishes," Tavormina said.

He probes them to consider if they are ready to actually give away certain assets immediately, such as real estate that they enjoy managing.

"Do I really want to lose control?" he asks them to consider.

Prepare the heirs

Bound up in timing is the question of whether the beneficiaries are ready to receive certain gifts.

"You want to benefit the next generations with the gifts," Tavormina said. But gifts to unprepared heirs can be double-edged swords.

They can help the younger generation as seed money to create their own ventures or establish successful careers.

"At the same time, sometimes parents are afraid that the assets might diminish their motivation," Tavormina said. "So it's trying to find the right balance, understanding your family."

Engaging the next generation with education around managing their family wealth is also key to successful gifting. Tavormina said Morgan Stanley has "wealth education products" targeted at these heirs to school them in handling a future inheritance, even if they didn't attend business school or study finance.

High net worth vs ultrahigh net worth clients

Depending on your client's wealth profile, their inclinations and needs around gifting can look significantly different.

Tavormina said clients who are merely high net worth tend to delay giving because lifespans are getting longer and inflation is nibbling away at the value of their portfolios. They have to ensure they don't run out of money to live on.

HNW individuals also generally don't have to worry about estate taxes because their assets that would have been gifted usually don't hit the estate tax limit, so they're not in a hurry to take advantage of the expiring special enhanced estate tax limits.

On the other hand, ultrahigh net worth clients are more insulated from these problems and often express increased interest in philanthropic giving.

Bequeathing the family business

When it comes to passing on shares of your client's company, gifting them to friends or individuals outside of the family is generally a big no-no.

"Don't try to make gifts that are connected in some way to other assets of the family, to friends," Tavormina said.

Tavormina said he tends to ask clients who own businesses: "Who created it with you?" If the business was created together with their spouse, then it makes sense to leave it to them.

If it's a family venture that the client inherited and in which the children are shareholders, then one way to ensure a fair handoff is to give the income stream to a surviving spouse but pass on the ownership shares to those children.

Heirlooms and art

Another challenge clients face is gifting fine art or "sentimental items like a vacation home," Tavormina said.

"We tell clients they should have open conversations with their family."

Instead of assuming that each of the benefactor's belongings should be equally split among their heirs, clients should be encouraged to apportion them based on who is most likely to need or appreciate the item in question.

"Perhaps there is a painting one daughter loves. Another person is clearly not connected to that," so the painting in question would go to that daughter, Tavormina said.