Best of both worlds equalization
- Providing a plain language hotchpot clause which, when accompanied by a ledge, provides the best of the two mechanisms for taking into account gifts to children while you’re alive in order to equalize children’s inheritances
Last week I compared two mechanisms for equalizing children’s inheritances where one (or more) of the children receives a financial gift during a parent’s lifetime.
One is a hotchpot clause in a will. The other is documenting the gift as a loan.
I listed the benefits of each mechanism with a plan this week to create and provide an example will clause that would achieve the best of both worlds.
Here is a draft I came up with:
When dividing the residue of my estate among my children, I direct my Executor to take into account any gifts that I have made to any of them during my lifetime and which I have decided should be taken into account on my death when determining their inheritance for the purpose of ensuring fairness between my children.
Any gifts to be taken into account will be listed on a ledger that I have kept for that purpose, entitled “Ledger of gifts to be taken into account for inheritance purposes” (the “Ledger”).
If a gift on the ledger includes a provision for interest, then the value of that gift to be taken into account shall include interest up to the date of my death.
Taking the gifts into account means the following:
- Adding the values of each gift listed on the Ledger, providing the total sum of gifts to be taken into account (the “Sum of Gifts”),
- Adding the Sum of Gifts to the amount of my estate being divided among my children, resulting in an adjusted amount for division (the “Adjusted Amount for Division”),
- Dividing the Adjusted Amount for Division by the number of my children, resulting in an unadjusted equal inheritance amount (the “Unadjusted Equal Inheritance”), and
- Giving each of my children the Unadjusted Equal Inheritance minus the combined values of any gifts that child received that are listed on the Ledger.
The ledger would be a simple table with the title “Ledger of gifts to be taken into account for inheritance purposes” having the following headings:
- Date of gift,
- Name of gift recipient,
- Value of gift,
- Interest rate and compounding frequency (if applicable), and
- Signature of Testator.
Each time you give one of your children a gift, you can consider whether you feel it needs to be added to the ledger to achieve fairness with your other children.
This mechanism achieves certainty about which gifts you do want taken into account and which you do not.
It’s clear from the will and the ledger itself that you’re not collecting money from your children. Rather, you are doing your best to achieve fairness between your children.
It allows for an interest rate because a gift of $50,000.00 given 40 years before your death has a significantly different value than the same gift given 5 years before your death. You can choose whether or not to apply an interest rate.
Unlike the loan option, these gifts will not be added to the total value of your estate for the purpose of calculating probate fees payable to the government.
And best yet, it avoids archaic language that nobody understands!
I have provided a draft will clause. But I strongly recommend against making a “do it yourself” will that includes it or trying to amend an existing will to add it. This draft clause might require modifications to work within an existing will structure.
I always recommend obtaining legal advice from a lawyer who might have much better ideas about how to achieve fairness among your children based on your particular circumstances.
