Wednesday, December 12, 2012
What do you mean the gift I got from my parents was my inheritance?
Posted by Lynne Butler
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.
There are a few things that might change the general rule I just mentioned. One is that the transaction was documented in a way that made it clear it was not intended to be an advance. However you've already said that there was no written contract, 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.
The second thing that would change the situation would be proof that you had repaid the amount. This appears not to apply to you.
The third thing would be a mention in the will that loans or gifts to children are to be forgiven. Sometimes this is called a "hotchpot" clause because it directs the executor on what is to be brought into the 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.
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.