Accounting for Gifts and Loans to Your Children in Your Estate Plan

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We know a family in which the parents, now in their eighties, have always been meticulously fair when making gifts to their two adult sons. When Grandpa no longer needed his car he decided to give it to his elder son, whose own son was heading off to college and needed a vehicle. Almost as he was holding out the keys with one hand, he was using the other to flip through the Kelley Blue Book; he wanted to write his younger son a check for the exact value of the car he was gifting to the elder one.

These parents, if perhaps more diligent than most, understood what many of us know instinctively. When children, even adult children, perceive they’ve been treated unfairly, they’re likely to be resentful. No parent wants to leave his or her children a legacy of bitterness and discord.

During your life, one or more of your children may need a little extra financial help in the form of a gift or loan. Short of making equal, simultaneous gifts to all, which may not be practical, how do you make sure everyone feels they’re being treated fairly? You may consider altering your estate plan to account for lifetime gifts and loans to your children.

Communication is Key to Keeping the Peace

Let’s say you have three children, A, B, and C. C found herself in dire financial straits, and you gave her $10,000 to get back on her feet, which A and B were aware of. You want all your children to feel as they were treated fairly. Should you give A and B an equivalent amount in your estate plan? Require C to pay back the funds (which she may or may not be able to do)? Simply tell A and B that C received more because she needed it?

What you do may not be as important as how you choose to do it. You are entitled to gift, loan, and bequeath your assets as you see fit. That said, clear communication can go a long way toward easing conflict between your adult children over perceived inequity. You can certainly say something to your kids during your life (“I helped C out with some extra money because she needed it. A and B, if you’d been in the same position, I would have done the same for you, but I’m glad you didn’t need the help.”), but you should definitely make clear your thought process in writing in your estate plan.

Your estate plan could state that you are not adjusting your estate plan based on gifts given. Or you could make adjustments, in which case you should be specific about the gifts that were made. Either way, the earlier you can manage expectations, the better.

Your estate planning document could state that you made gifts as you saw fit during life, but that you are not adjusting your estate plan based on those gifts. In the alternative, you could make adjustments, in which case you should be specific about the gifts that were made, and to whom, so they understand why their inheritance is reduced.

Of course, the earlier you can manage expectations, the better. If, when you’re giving C the money, you can let her know that she may receive less from your estate as a result, she’ll understand later that the reduction is your effort to be equitable, not a slight.

Dealing with Loans in Your Estate Plan

If you are loaning, rather than giving, your children money during your life, don’t assume a handshake agreement will suffice. Writing offers clarity for you, the child to whom you’re loaning money, and your executor and other beneficiaries. If you do make a verbal loan, understand that it will be difficult for someone (like A or B in the above scenario), to prove. An attempt to prove it could lead to a long, costly, and bitter court battle, as well as a rift between your children.To avoid this, you might provide in your estate plans that any verbal loans made to children during your life are to be treated as gifts upon your death.

If you don’t want to forgive outstanding verbal loans, be sure to memorialize the loan, and your wish that it be repaid to your estate, in writing. Alternately, you can provide that the loan is to be treated as an advance against the recipient’s inheritance. To prevent child who received the loan from claiming that you verbally forgave it, you can state in your estate plan that loan forgiveness must be in writing.

Whether you are gifting or lending money, it’s of paramount important that both you and your child, and any others who may affected, understand your intentions. If you have concerns about accounting for gifts or loans to your children in your estate plan, we invite you to contact us to schedule a free initial consultation. A little advance planning and careful communication can preserve not only your estate’s assets, but your family harmony.

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