The fairness of equal gifts by parents should be carefully considered
Charles was recently interviewed and discussed why equal gifts by parents are not always viewed as fair by their children (full video is here and the full story is here). A couple of scenarios were discussed in which equal gifts by parents may result in disputes among their heirs.
In the second part of this interview Charles provides more examples of these kinds of scenarios.
One such scenario is referred to by Charles as the “cottage and the cash”. This refers to a dilemma that parents have when trying to treat children equally. If one child really likes the family cottage the parent may want to leave it to that child. The parent may then leave another child cash in the will that would equalize the cottage gift. For example, if the cottage is worth $500,000, the parent may leave a cash gift to the other child of $500,000. This seems equal and fair at the time the will is signed. However, if many years pass until the death of the parent, the cottage may have increased significantly in value.
The value of the cottage may have increased to $2 million. The child receiving the cash gift at the time of the parent’s death will not view those two gifts as equal.
The lawyer drafting the will in this scenario should also consider tax consequences. If the cottage is not a principal residence, there will be a deemed disposition at the time of death with capital gains taxes. There may then be a fight over who is responsible to pay the taxes. It may be the estate that is responsible for paying capital gains or the child receiving the cottage.
Gifts by parents while alive may be treated as loans to be later repaid
Another scenario that may result in a dispute after the death of a parent stems from money given while the parent was alive. For example a parent may have four children and the estate may be worth $1 million. The parent’s will may leave the estate equally to all four children, meaning each child would get $250,000.
After a parent dies, it may be revealed that one of the siblings received money from the parent during their lifetime. For example, one of the siblings may have gotten $250,000 from the parent while alive. The other siblings may ask for that money to be paid back to the estate. This will likely result in a dispute as to whether or not the $250,000 was a gift.
This kind of a transaction should be properly documented while the parent is alive, specifically, whether it is a gift or a loan. Additionally, the parent’s will should also specify what kind of transaction it was. The intention of the parent should be clear.
However, even if the transaction is properly documented, there may still be a fight. For example, a parent may write a note stating that one of the siblings was be gifted the $250,000. The other siblings may argue that the parent didn’t know what he or she was doing or was forced or unduly influenced to write the note and transfer the money.
A lot of these issues can be avoided with a properly drafted will. The drafting lawyer should ask the testator about significant gifts given to children during the testator’s lifetime.
It is very important to get proper legal advice when preparing an estate plan.