Most adult children are shocked to find out that the down payment for a home given to them by their parents 20 years ago is going to reduce or eliminate what they receive from the parents' estate. Because everyone involved referred to the transaction as a "gift", it's optimistically assumed that we can all just ignore that it happened. However, that's not the case. I received a question from a reader that addresses this issue, and I'd like to share it with you here.
Here's the question:
"Both my parents have now passed and my sister is the executor of the estate. She is now saying that the gift money my parents gave my husband and myself when my husband lost his job is my inheritance and that now I do not get my portion of the estate which is set out in the will. She says that any gifts by law are held against one's inheritance and that this is what her lawyer told her and she only wants to do what is right by the law. Is this correct? When Mom and Dad were helping us it was with a monthly amount and there was never any written contract between us or anything specified in the will but my sister knew it was a gift and I think now her resentment is coming out. But if this is correct by the law then that's fine with me."
As a general rule, it is true that gifts like the one you describe from a parent to a child during the parent's lifetime are considered to be advances on the child's inheritance. Your sister is right.
You've already said that there was no written contract or other documentation of the gift, and in fact it would be relatively unusual for a transaction like this between a parent and a child to be properly documented. Nobody ever suggests documenting it because it seems like a suggestion that one doesn't trust the other. Even if there had been full documentation of the amount and its purpose, it would still be considered an advance on your inheritance.
There are a couple of things that might change the general rule I just mentioned so that you might still share in the estate.The first thing that would change the situation would be proof that you had repaid the amount you were given. This appears not to apply to you.
The second thing would be a mention in the will that loans or gifts to children are to be "forgiven". Sometimes this type of clause in a will is called a "hotchpot" clause because it directs the executor on what is to be brought into the general estate or hotchpot for distribution. Ideally, whenever a parent has given money to one or more of the kids, there is a clear statement in the will about whether the money is to be repaid or not. In this context, "repaid" means being taken out of your inheritance, as it is in your case. However, you've said that there was nothing in the will that addresses this. Most wills don't address it, though they should.
In the absence of these exeptions, the general rule will stand and the amount you received from your parents will be considered an early inheritance. It seems that your sister has consulted a knowledgeable lawyer who has explained the rule properly to her.
I recommend that any parent who has loaned or given money to their adult kids address the situation in their will.
I don't see how this is handled in practical terms. If I gave my daughter $100 for each birthday for 20 years, does that come of her share of the estate? How about if I give her $1000, or $10,000 while giving her brother a different amount for his birthdays? Who would ever keep track of this stuff?
ReplyDeleteIn the question asked, what if the parents had made the cheques out to the questioner's husband. He isn't in the will, so the amount wouldn't come of her estate.
You deal a lot with joint account ownership, and I have read all of them I could find, but I have never seen 2 questions answered clearly:
ReplyDelete1) do amounts "given" by putting accounts in joint ownership count as gifts?
2) what, if any, tax on, say, a brokerage account, is avoided by holding jointly with right of survivorship?
I suppose this gets into how a joint (parent/child) account is taxed at death vs. how it is taxed at the time of the gift AND how any gains/earnings are taxed while both are living.
Hi David,
DeleteI'll see what I can do about clearing up confusion about joint accounts. There is a good reason that it's hard to answer the question about joint accounts being gifts; the law has changed and financial institutions have not all kept up to date. The old law of joint accounts was that if there are two joint owners of an account and one dies, the surviving owner gets the money, no questions asked. The new law - which is case law, not a written statute - says that joint accounts between generations are NOT true joint accounts unless there is evidence from the original owner of the money that they intended it to be a true joint account. You can see how this is a bit complicated for banks, investment houses and everyone else to get used to. What has happened is that some places are following the new law and others are not. Therefore it's impossible for me to say with any certainty what would happen with any individual joint account. I believe it's going to take a lawsuit against a financial institution before there is consistency across the board.
For now, lawyers are advising parents not to put money into a joint account with one of the kids unless either the parent's will confirms the intention for the joint money, or there is some other evidence that fits the rules as set down by the courts.
This area of law is a mess right now.
As for the tax savings on a brokerage account, I think that would be answered much more capably by an accountant than by me.
Lynne
I heard about another situation for money given by the parent while the parent was alive - if the parent's [adult] children happen to be disabled, the courts might say that "if the disabled [adult] child was financially dependant on the parent then that disabled adult child should get a GREATER share of the inheritance to ensure their long-term well being".
ReplyDeleteOr is this not true?
Yes, that could happen. If the estate is relatively small, so that a disabled adult's equal share is not enough to provide for that person for his or her whole life, a judge might decide to give the disabled person a larger share of the estate than the non-disabled children. Normally this would be discussed if someone (including the Public Trustee) brought an action to court on behalf of the disabled adult.
DeleteLynn