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Monday, January 23, 2012

How do I document an advance on an inheritance?

Giving someone an advance on an inheritance, and documenting it properly, can be done pretty simply. But there are a few things to watch out for. The following question from a reader raises the topic:

What is the legal procedure for a testator to give an advance to a beneficiary for a portion of their inheritance? In this case, the niece of the testator is named as a specific beneficiary in the will, but is very short on money and the testator has offered to advance them some of the money that they will inherit when the time comes. I am the executor named in this will and want to make sure that this advance is properly documented so that it won't complicate my life down the road. Would a signed statement from the testator indicating the date/sum of money/fact that it is an advance on the amount specified in the will be sufficient? Or is anything more required?

It's great that everyone in this situation appears to be working together. That's more rare than you know. I completely agree that the advance should be properly documented. This should, as you say, prevent your life as executor from being harder than it has to be. After the testator passes away, it will also give clarity to other beneficiaries of the will about what is going to happen. It will give reassurance that the testator's wishes are being properly carried out.

There isn't any particular form or notice required to be prepared. The signed statement you  mentioned would be sufficient. Make sure that the note is clear that it's an advance, not a loan or a gift. It doesn't need witnesses. It would be a good idea to keep the statement with the will.

An issue to keep in mind is that of mental capacity of the testator. You haven't mentioned it or the age of the testator. The testator should understand the nature of the transaction, and understand how it impacts his or her current financial condition. In other words, the testator shouldn't be giving away money he or she can't afford to give. If there is any question of capacity, the person to assist the testator is not the executor but the person appointed under the Enduring Power of Attorney.

One final note. Make sure that the will does not say that advances are not to be taken into consideration when the estate is divided. This would directly contradict the statement signed by the testator and could end up requiring you to ask the courts for direction.

10 comments:

  1. Thanks for the answer! The testator is definitely mentally capable and the sum of money involved is small relative to the overall value of the estate (though a sizeable amount relative to what the specific beneficiary will receive), so the advance itself is not a concern. I just wanted to make sure that it was sufficiently documented to avoid questions down the road.

    Which brings me back to the second part of the question that I had asked. Would the amount of the advance need to be adjusted for inflation when determining how much a beneficiary is still entitled to in the will. To be strictly fair to all beneficiaries, it seems like inflation should be taken into account as receiving the money now is obviously better than receiving the money in 5 or 10 years time.

    Perhaps an example would make my question more clear. Say a will states that two beneficiaries are to receieve $20,000 each and the testator gives one of them an advace of $10,000 today. If the testator passes away 10 years from now, the beneficiaries are entitled to $20,000 each (in 2022 dollars). However, assuming annual inflation of 2%, the $10,000 advance paid today would be equivalent to $12,189.94 in 2022 dollars, so what is the balance remaining to be paid to the beneficiary that received the advance?
    $10,000 (20000-10000) or $7810.06 (20000-12189.94)?

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  2. My elderly mother wants to add my two brothers and I as joint tenants to her house (so as to avoid probate costs upon her death).

    I have read the horror stories posted here and your comments re not advising this yourself. My one brother (in his 50's) still lives with my mother in her house. Even if we were all made joint tenants, there could be a possibility that he would not want to sell the house upon her death, choosing to live there as he always has.

    Am I correct in assuming that we could not make him sell the house?

    My mother also gave him $60,000.00 to purchase his own condo (which he barely lived in and has since sold) with the understanding that said sum would come off the proceeds of the estate. Thank you for your advice re using the word "advance" and not "gift" or "loan".

    Thank you also for your very, very informative site.

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    Replies
    1. Re: Lynn's incisive comments, it is indeed best to avoid family in-fighting, at all costs, as it just never gets better, just worse unless personal advances or loans or other risky family ventures are resolved quickly, or organized carefully initially. But the importance of an advance is not lost on me or anyone else who isn't blessed with millions of dollars in the bank. A lot of people these days do not have great cash flow, and that carries over to folks who are expecting an inheritance. But what do people, heirs, do if they do not have generous moms or other relatives who are willing to lend them an advance on their upcoming inheritance. There are not too many viable options out there if there are no generous relatives available or a lot of cash in the bank. There are estate advances however, commonly known as probate loans, probate advances or inheritance loans. Also called inheritance cash advances and probate cash advances. Provided by established inheritance advance firms such as www.heiradvance.com,www.inheritanceadvance.com, or perhaps www.inheritancenow.com - with 20+ years of experience dishing out advance trust and probate cash via large and small trust fund inheritance loans and probate loans, 72-hour inheritance advances, and so on. At least this saves people from the stress or emotional problems that arise from borrowing against an inheritance via family members. That type of arrangement does often go south for some peculiar reason, I don't know why exactly, it just does. And when heirs take out a loan against an inheritance with a professional company, it tends to go smoothly, with no family emotions involved, thankfully. Anyway that's my take on this inheritance advance or inheritance loan issue.

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    2. Yes, inheritance loans are an option, though I would certainly wish to work only with a long-established company. Over the years, many beneficiaries have asked me if I, as the estate lawyer, could advance them money on their inheritance, and of course I can't. The best I could do, assuming there is actually money available in the estate, is to talk to the executor about doing an interim distribution.

      The downside of getting a loan against an inheritance is, of course, that at the end of the day you've had to pay for the loan so you'll end up with less inheritance. However, in a cash squeeze, some people are willing to make that trade-off to have access to funds more quickly.

      I also agree - COMPLETELY - that there is something to be said for keeping financial arrangements out of the eyes of family members who are going to criticize those who are more in need of immediate funds.

      Lynne

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  3. Hi there,
    Yes you are correct. The signatures of all joint tenants are required to sell the house. I can see a real problem shaping up here. Not only can the rest of you not receive your inheritance if the house isn't sold, but the set-off of $60,000 won't happen either.

    Speaking of the $60,000, is the "understanding" written down by your Mom anywhere? Does she mention it in her will? Most people in your brother's situation claim that the money they received was a gift and was not meant to be repaid or set off. This could be bad in your situation because your brother would have leverage (i.e. you want him to sell the house).

    A bit of tough love is needed here. Ask your Mom what's more important - saving on probate fees or setting up an estate that is fair to all the kids and won't cause family fighting.

    Lynne

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  4. In the first situation regarding getting an advance on inheritance. The testator is no longer capable my sister and I are the only ones named in the will. We are also joint POA's for the testator (mom) there is plenty of money to care for her for rest of her life. Can we take an advance on our inheritance if we both agree in writing?

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    Replies
    1. No, you cannot.

      Since your mother is alive, you have no legal right to inherit anything until she passes away.

      You seem to be under the impression that you could legally use the POA to advance money to yourself, but you are wrong. Doing so would be a breach of the fiduciary duty you owe to your mother. In other words, you are not allowed to take her money for yourself.

      There is no such thing as helping yourself to an advance on inheritance. That's stealing.

      Lynne

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  5. Testator passes; USA resident; leaves 2 x 160 acre parcels of bare land appraised at $208K per parcel; no cash or accounts in Canada. 5 children all USA residents (dual citizens of Canada/US).
    1. One to inherit needs cash. Advice on how to help via advance or other? Could the executor/POA establish an agreement basically 'selling' their inheritance portion?

    2. Capital gains of $176K per parcel creating 25% tax of 50% of land value. $176 x 2 / 50% * 25% = $44K CAD. Need clearance to sell; need to sell to pay tax. Catch22. Any advice on how to proceed?

    Excellent blogspot. Wish there were more like this one. Sometimes the layperson just doesn't quite know how to ask a question.

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  6. Hi I am in need of some advice. Mom recently declared mentally incapable. POA is to be divided 50/50 between brother and sister. There is cash and a clear titled house - valued at $450,000 -that sister wants to buy. Sister has own home valued at $400,000 but no extra cash. Sister would like to draw-up agreement so she can purchase mom's house ASAP. Problem: House is vacant. Mother living in seniors home. How can she draw up that agreement when mom does not technically have an estate yet and may not have for 20 years and would the arrangement be beneficial to the estate if she bought it now? What if the value of the property escalates before the "estate" happens? How can she buy without future problems encountered? Thankyou

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    Replies
    1. Interesting how you and your sister seem to think that being a power of attorney is the same thing as being a beneficiary. If you two are POAs, NOTHING is being divided between you. It only means that the two of you must look after things for your mother. You cannot touch the cash unless you are using it to pay your mother's bills. You are entitled to sell your mother's home as long as you get fair market value for it and as long as the funds are invested for your mother. You two are talking about dividing up assets and "the estate" when you're supposed to be helping your mother, not helping yourselves. I strongly urge the two of you to see a local lawyer who works in estate law to find out what you're supposed to be doing because it honestly sounds as if the two of you have no idea what POAs are supposed to do.

      Lynne

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