While some family circumstances dictate that some children be treated differently from others, in many cases parents want their children to receive equal portions of the family’s assets. At the same time, they may find that they are providing more support to some children compared to the “financially independent” ones. For example, you may lend a child money for a down payment on a house or to start a new business venture. Or you may help another child by buying them a reliable vehicle or make an outright gift of money to help them get through a rough patch or fend off foreclosure. How can you address both situations through estate planning? By using a hotchpot.
A hotchpot works by adding advanced/gifted amounts back into the total inheritance pot, calculating the portion each beneficiary is entitled to, and then distributing to each beneficiary their portion of the hotchpot minus any amount they have already received.
Here is an illustration:
Let’s say you have three children whom you want to treat them equally, so you designate that each child will receive one-third of your estate.
For the sake of this illustration, let’s also say that the following events happen:
You decide to move into a condo and you give the family home, valued at $120K, to Child A
At the time of your death, you have a $360K estate
If each heir is given one-third ($120K), Child A will have received the house (worth $120K) plus $120K - double what the others receive.
What about deducting the value of the home ($120K) from Child A’s one-third share? That also would lead to an unequal result (and possible strife or hurt feelings): Child A would have received the $120K home while his or her siblings would each get $180K.
What’s a parent to do? Hotchpot to the rescue!
A hotchpot clause in a trust or will instructs that specified gifts and unpaid loans be treated as advancements against a beneficiary’s inheritance and directs the trustee or personal representative to incorporate those advances into a hotchpot before dividing up the trust or estate. Each of the heirs receives their portion of the hotchpot minus any advancement they already received.
Looking back at our illustration, the hotchpot would equal $480K ($120K house plus $360K estate). Child B and Child C would each receive $160K (one-third of the hotchpot) and Child A would receive $40K (one-third of the hotchpot minus the $120K advancement).
Let’s double-check the math:
$40,000 (Child A)
+ $160,000 (Child B)
+ $160,000 (Child B)
$360,000 estate distributions
You must document your intent, in writing, of each loan or gift you want included in the hotchpot. Otherwise, the lifetime gift will have no effect on how your estate is divided and your heirs may be grumpy and mad because they feel like they were treated unequally. Your JGB attorney can help ensure that your wishes are carried out when you’re no longer able or around to state them. Hotchpot clauses are a useful tool in that work.
Happy Holidays and Happy New Year from JGB! Cheers!
-----
TrustGuardTM 2023
TrustGuardTM enrollment for 2023 is now open. TrustGuardTM is a JGB proprietary, process‐driven program designed for our clients who are serious about protecting their investment in their Trust‐based Estate Plan with an annual review.
A subscription to TrustGuardTM includes: an annual review of your estate plan and trust funding assistance for the enrollment year, any required changes to your plan, access to our exclusive TrustGuardTM quarterly newsletter, and an invitation to our annual TrustGuardTM appreciation event. Enrollment invitations were sent out for all our enrolled TrustGuardTM clients as well as our clients who executed their documents in 2022.
Enrollment for the 2023 TrustGuardTM period ends on February 28, 2023. JGB clients who do not re‐enroll during the enrollment period will not have another opportunity to become members of TrustGuardTM.
Participation in TrustGuardTM is entirely voluntary. The TrustGuardTM enrollment subscription is billed at an annual flat rate. Clients who pay their enrollment in full prior to February 1, 2023 will receive a $100 discount off of the price of full enrollment. If you are eligible in becoming a TrustGuardTM client, please contact our office for a TrustGuardTM Enrollment Form.