It is common for parents to gift or loan money to their children during their lifetime. These gifts may be equal to each of their children or they may not be.
It is important in your will to specify how you want to deal with these gifts and loans. Do you want all gifts and loans to be forgiven at your death or do you want the gifts and loans to be deducted from your children’s share of your estate?
If you want to forgive all gifts and loans it may be a good idea to add a clause to your will stating this. This will clarify your wishes and reduce potential conflict between your children.
If you want gifts and loans deducted from your children’s share of your estate this can be done but not without documents that track and set out the details of any gifts and loans. For loans the documents need to set out how much was loaned and when, was interest owed and were any payments received. Without these documents it will be very difficult to determine how much should be deducted from the child’s share.
The clause in your will that deals with this is called a “Hotchpot Clause.” The amount received by your children is notionally counted as part of the residue and the estate is then divided pursuant to the terms of the will.
For example, if the actual cash value of the residue of your estate is $800,000 and you gifted or loaned 2 out of your 3 children $50,000 each during your lifetime, the equal division of your estate amongst your 3 children may look like this:
Cash Value of Residue: $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
Deborah A. Todd