It’s common for parents to gift or loan children money to their adult children during their lifetime and the amounts may be different for each child. A person can specify how to deal with these types of gifts and loans in their Will. For example, will all monies gifted or loaned be forgiven at death or will they be deducted from each child’s share of the estate?
If a parent wants to forgive all gifts and loans made to their children during their lifetime, it’s important to add a clause in their Will stating this which can help to reduce potential conflict between children after the parent dies. If any loan amount is to be deducted from a child’s share of the estate this can be done but usually not without a detailed record showing when and how much the initial loan was, whether there was interest accrued, how much was paid back (if any) and what is still outstanding.
The part of a Will that deals with this is called a “Hotchpot Clause” and any amounts to be repaid by children are notionally counted as part of the residue of the estate which is then divided pursuant to the terms of the Will. For example, if the actual cash value of an estate is $800,000 and the will-maker loaned 2 out of 3 children $50,000 each during their lifetime, the equal division of the estate among all 3 children may look like this:
Cash Value of Residue of Estate: $800,000
Advance Loans/Gifts in Hotchpot: $100,000
Total Residue $900,000
Each Child’s Share: $300,000 ($900,000 ÷ 3)
Child #1 receives: $250,000 ($300,000 less $50,000 gift/loan)
Child #2 receives: $250,000 ($300,000 less $50,000 gift/loan)
Child #3 receives: $300,000
Total Cash Distribution: $800,000
However without documentation showing the status of a loan that is intended to be paid back by a child, it may be very difficult to determine how much should be deducted from that child’s share of the estate.
Deborah A. Todd