Mary Holm endorses David's advice re family loans. Does your Will need amendment....
Well known financial commentator Mary Holm answered (Herald 25 October 2014) a letter concerning how best to handle the common situation involving a loan to a family member to avoid future complications and family upset.
David wrote a letter in reply which appeared in the Herald on 8 November 2014, along with Mary's supportive reply. The text of the letter (with a little more detail) and reply are reproduced here;
As a lawyer since 1972, I agree with all that you said about documenting loans to children.
I would like parents to consult their lawyer, not only about the form of the IOU documentation (no-one can advise about that better than we can –particularly about the IOU being a joint one if the child is in a relationship and the loan/gift is to benefit both the child and the partner) but also about the benefits of amending the parents' wills to include a hotchpot provision.
The provision should:
(1) Record the loan or gift.
(2) Mention any past or future loans or gifts to be brought into account (possibly excluding any below a certain dollar figure or before a certain date).
(3) Provide for those gifts and any unpaid loan balance being deducted from that child's share of the parent's estate.
(4) Thereby prevent "double dipping".
In an estate of $800,000 left to children A, B, C, and D, with a loan or gift of $40,000 to child B still outstanding when the parent dies, the $40,000 is treated as part of the estate. So there is $840,000 to distribute. That's $210,000 each.
Children A, C and D would each receive that amount. Child B would receive $170,000 ($210,000 minus $40,000). And that would deal with the $800,000 estate because $210,000 x 3 = $630,000 + $170,000 = $800,000.
The hotchpot clause means that the parent doesn't need to involve the other members of the family at the time the loan or gift is made. A parent might want to help a child without other children knowing at the time. The will can also be changed if the parent later decides that the loan/gift should be a benefit that the child receives in addition to that child's equal share of the parent's estate. Properly drafted the clause doesn't have to be changed for future loans or gifts.
The greatest benefit is harmony and fairness among the children after the parent has died.
One bonus I've seen is where the remaining siblings acknowledge that the favoured child needed and deserved greater help than the rest of them and resolve to ignore the hotchpot provision and direct the executors to divide the parents estate equally. The parents have given the siblings the chance to show how they care if they choose to override the hotchpot.
Mary Holm's reply was
"When I started reading your letter, my reaction – to be honest – was, "Here's a lawyer just drumming up business for himself and his colleagues." But you put up a pretty good argument, which I suppose is what we should expect from a lawyer!
The hotchpot idea makes a lot of sense and I particularly like your point that it can remove the need to tell other family members about a loan. While open communication is often good, there are situations when it may not be.
By the way, I love the name "hotchpot", which Wikipedia says means "the blending or combining of property in order to ensure equality of division". Apparently the word comes from a kind of pudding"