It is often the case that a testator may wish to make a significant inter vivos gift to one or more of their children. He or she may intend that such a gift is to be taken as either an advancement or in addition to a later inheritance. If, in preparing a Will and/or estate plan for a testator, a solicitor becomes aware of prior inter vivos gifts to the testator’s children, the solicitor should inquire further into the testator’s intention in this regard in the context of the estate plan.
Sometimes the dynamics in a family are such that any inequality as between siblings can become a serious issue, potentially leading to estate litigation following a testator’s death. If a testator is aware of this possibility, the testator should be alerted to the possible financial consequences of such a dispute. Of course, there is no way to guarantee that estate litigation will be avoided, but there are steps that can be taken in an estate plan to try to make the administration and distribution of an estate as smooth as possible.
One simple way of at least addressing the issue is to include a clear statement of the testator’s intentions in the Will, such as an indication that any gifts given during the testator’s lifetime are to be considered an advance, or should be given in addition to the child’s entitlement under the Will. Unfortunately, this will not necessarily avoid a fight amongst siblings if any of the children who have not received inter vivos gifts are not happy with the outcome, or if the child who did receive a gift expected to also receive an equal share of the parent’s estate.
An option for ensuring a truly equal distribution is a hotchpot clause. This is also an option if the testator does, in fact, intend that inter vivos gifts were to be given as an advancement on the child’s future inheritance, as is often the case.
A “hotchpot” clause will operate to take into account the value of gifts given during the testator’s lifetime in calculating the division of the estate, with any gifts previously given being subtracted from the portion given to the child in question. Effectively, the value of any substantial inter vivos gifts will be clawed back into the estate for the purpose of determining the value of the estate and the ultimate entitlement of the child or children who received such gifts. The end result of a hotchpot calculation will be that each child will receive from their parent, either inter vivos or from the estate, a share of exactly equal value. Hotchpot can be in relation to inter vivos gifts given, or to the forgiveness of outstanding loans given during the testator’s lifetime.
The concept of hotchpot is based on the equitable doctrine of ademption by advancement, also known as the presumption against double portions. This principle presumes that a parent intends equality between his children, such that if he or she leaves the residue to his or her children equally, but also made an inter vivos gift or advancement to one of the children, the rule will apply to bring the gift into hotchpot so that the intention of equality will not be altered.
Hotchpot, or ademption by advancement, also applies in the case of an intestacy. Section 25 of the Estates Administration Act, R.S.O. 1990, c. E.22, provides that if the child on an intestacy has been advanced assets, with such advancement being expressed by the deceased or acknowledged by the child in writing, the value of the advancement will be considered, for the purposes of s. 25, to be part of the estate to be distributed.
Accordingly, the default position when it comes to inter vivos gifts to a testator’s children will likely be equality, and as a consequence, some form of hotchpot calculation. Chances are that parents usually do intend to divide their estate equally amongst their children, so this rule will probably operate in line with the testator’s intentions in most cases. If a testator does wish to treat their children unequally, the estate plan must be carefully prepared with a view towards all possible consequences.
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When one thinks of a “trust fund baby“, images of a lavish lifestyle supported by family wealth probably come to mind. But with the images likely comes the sad realization that such a lifestyle will not be enjoyed be you; either you are born into such wealth or you are not. But is this necessarily true? Could you be adopted into a trust, and with it adopt the lifestyle of a trust fund baby? If a trust has been set up which provides that the beneficiaries of the trust are to be the issue (i.e. children) of a specific individual, if such an individual legally adopts you, would you become a beneficiary of the trust?
In Ontario, the legal status of adopted children is governed by the Child and Family Services Act (the “CFSA“). Section 158(2) of the CFSA provides that, for the purposes of the law, upon an adoption order being granted the adopted child becomes the child of the adoptive parent and ceases to be the child of the person who was his or her parent before the adoption order was granted.
With respect to the question of whether an adopted child gains status under any will or trust, section 158(4) of the CFSA provides:
“In any will or other document made at any time before or after the 1st day of November, 1985, and whether the maker of the will or document is alive on that day or not, a reference to a person or group or class of persons described in terms of relationship by blood or marriage to another person shall be deemed to refer to or include, as the case may be, a person who comes within the description as a result of an adoption, unless the contrary is expressed.” [emphasis added]
Simply put, so long as the will or trust deed does not specifically preclude adopted children from becoming included as part of any class of persons described by relationship by blood or marriage, an adopted child would be treated no differently than a biological child in determining who forms part of such a class. As a result, presuming that the trust in question does not bar adopted children from becoming beneficiaries, should the wealthy individual contemplated in the hypothetical above legally adopt you, you would become a beneficiary of the trust.
Your dreams of living as a trust fund baby may not be over yet. Thank you for reading.