Last week’s column responded to a parent’s question about providing financial support for a child and wanting those advances to be factored in when distributing the parent’s estate after death. The parent wanted the money advanced to the only daughter to reduce her share of the estate later. Apparently, the discussion of âacceptance,â which is the reduction of a recipient’s share of the amount they have already received, is popular. I had a lot of follow-up questions and comments!
One reader pointed out that the girl who receives money now and whose share will be reduced later should be informed of the current acceptance. The reader went on to say, “In the situations we are experiencing, the frequently bailed out child often assumes that the funds are coming from his parents’ deep pocket and that there will be no future consequences for him.” Absoutely! I agree that the child is informed of the subsequent reconciliation. Knowing that there will be consequences could also have a positive effect on their current âborrowingâ behavior.
Another reader asked, and if, at the time of the parent’s death, there was not enough money in the estate to even out the distribution, as not only did the child bleed his mother’s estate, but the end-of-life expenses have also been used to deplete assets? In this case, whatever was left would go entirely to the âsolventâ child and, unfortunately, there would be no way to make the distribution âequalâ. By the way, you might be surprised to find that it’s not uncommon for some parents to prepare their estate plans to intentionally favor a financially irresponsible child at the expense of another more established child. When asked why the disparity, parents may say something like “Well, Susie went to college and has a successful career, but Betty didn’t go to college and is living from day to day.” . Therefore, we have to leave more to Betty; she needs it. We wonder what kind of message these parents send to their children. Susie is punished for working hard and being successful while Betty is rewarded for not trying to improve.
Another reader noted that if the money given to a child exceeds the currently authorized donation amount of $ 15,000 per year, a tax return of 709 donations must be filed to report the donation. It’s correct. Carmel CPA David Wilsey uses filed income tax returns as an alternative source of proof of donations and the amounts reported are used to reduce the child’s inheritance. If the parent does not wish to file income tax returns, they could structure the advances as a loan with the intention of repaying the advanced money, either now or after the parent’s death. In this kind of situation, a promissory note is prepared with the appropriate annual interest due.
In my previous column, I emphasized the need for parents to ensure that they communicate to their trustee or executor whether the advances are gifts or loans and whether the monies paid should be used to reduce the future inheritance of a child. Make sure clear and concise records are kept. Your trustee will thank you.
Liza Horvath has over 30 years of estate planning and trust experience and is a Chartered Professional Trustee. Liza is currently President of Monterey Trust Management. This is not legal or tax advice. If you have a question, call (831) 646-5262 or email [email protected]