Issue 43.13
No parents want their children to fight among themselves after they are gone. Sadly, conflicts often arise, especially when a parent has gifted or loaned money to one child and not others. However, a few key words in your estate plan can minimize the potential for conflict.
If you give money to one child, the other siblings may claim that the child should receive a reduced share of your estate. Clients should make their intent clear in their estate planning documents. For example, the document could state that you are not making any adjustments based on gifts. This would make it clear to everyone that no one should receive a reduced share. Alternatively, you could specify the gifts that have been made and explain why one child is receiving a reduced share.
Loans are another problem. Loans can be addressed in a number of ways, depending on your intent. Verbal loans are difficult to prove, so I recommend including a provision in your estate planning documents stating that all verbal loans are a gift. If you have any outstanding verbal loans that you don’t want to be a gift, then make sure you put these in writing. If you want the loan to be an advance against inheritance, this can also be specified in your estate planning documents. To avoid a child claiming the loan was forgiven, you can require that the forgiveness be in writing.
In the 13th century the old English term “hotchpot” began being used to address this problem within an estate plan. A hotchpot clause ensures the blending or combining of property to ensure the equity of division. Modern estate planning rarely uses the term “hotchpot” to address this issue, but you will often see hotchpot clauses in estate planning documents.
In essence, such a clause would work this way. A child’s loan or advancement gets added to the estate as if the estate still had those monies. The estate is divided as if the “extra” was there. Each child is allocated a share with the child who has the loan outstanding or who received the advancement getting a share less the advancement or loan amount they already received. The end result is that the monies previously advanced or loaned during the lifetime of the decedent are accounted for and the child that received the money during the decedent’s lifetime gets less at the time of death.
In considering this issue, the important thing is to make sure your estate planning documents clearly convey your intent. Be sure to consult your attorney to ensure your documents provide guidance you want regarding gifts and loans.
Jeffery J. McKenna is a local attorney serving clients in Utah, Arizona and Nevada. He is the former President of the Southern Utah Estate Planning Council and a shareholder at the law firm of Barney, McKenna, and Olmstead with offices in St. George and Mesquite. If you have questions you would like addressed in this column, you can contact him at 435 628-1711 or jmckenna@barney-mckenna.com.