You love all of your kids equally, because of course you do (or at least you’ll go to your grave telling people that).
In a world that is increasingly expensive, parents in effect advancing part of an inheritance to a child by providing financial assistance (for example, helping with the down payment on a family home) has grown common. In a family with multiple children, this can cause fairness issues once you pass and your Will specifies you wish your estate to be split equally among your children.
We will use a three-child family as an example. Lurleen, Kirk, and Troy are all the children of John and Jane Smith. Lurleen does well in life, becomes a country music star, and is financially independent at a young age. John and Jane have never needed to provide financial assistance to her.
Kirk, on the other hand, is in financial difficulty. He is unable to make ends meet as his job at the Cracker Factory does not pay well, and to make matters more stressful he is a single dad with a young son at home. John and Jane provide him with the $100,000 down payment to help purchase a townhouse.
Troy is a mess. Despite being in film and television, he makes a few too many bad financial decisions and is constantly on the brink of bankruptcy. John and Jane keep him afloat by paying some of his monthly bills, totalling $200,000 throughout the years.
John and Jane pass away with an estate totalling $1,500,000. Their intention was that the residue of their estate be split equally among their three children, but that the money given to Kirk and Troy be taken into account as part of their inheritances.
Without a “hotchpot” clause written into their Will, the $1,500,000 would simply be split equally among the three children, despite the difference in financial assistance provided to each of the children during John and Jane’s lives. Lurleen, Kirk, and Troy each receive $500,000. The resulting difference in how much each child received from their parents throughout their life seems unfair.
The concept of fairness is where the hotchpot clause becomes important. Defined in Black’s Law Dictionary as “the blending and mixing of property belonging to different persons in order to divide it equally”, it is essentially a method of ensuring an overall equal division among beneficiaries by adjusting the share each beneficiary receives from the estate by the amount received by them prior to the Testator’s death.
Luckily, John and Jane have a hotchpot clause in their Wills and so do take into account for the $100,000 previously advanced to Kirk and the $200,000 previously advanced to Troy.
The effect is that the value of their estate is calculated to be $1,500,000 plus the $300,000 in inter vivos gifts given to Kirk and Troy, for a total of $1,800,000 to be split equally between the three children. This seemingly leaves each of the children $600,000. However, Kirk’s $600,000 is reduced by the $100,000 previously given to him, leaving him with $500,000 from the estate. Troy’s is similarly reduced by the $200,000 previously given to him, leaving him with $400,000 from the estate. Lurleen receives the full $600,000 from the estate. When added up, Kurt’s $500,000, Troy’s $400,000 and Lurleen’s $600,000 equal the original $1,500,000 that is the actual value of the estate.
Through combining inter vivos gifts with the residue of the estate, all three children have now received equal amounts from their parents, fulfilling the wish of John and Jane.
This scenario shows how the hotchpot clause promotes fairness in a Will while also considering the fact that parents support their children in different ways while alive. It is a great tool to use in a Will if you have multiple children, and it can help ease the stress and hard feelings between family that can often arise after the parents have passed away.
We at Baker Newby have decades of experience in Estate Planning matters and would be happy to advise you on the most effective and efficient plan for your particular estate. Contact us today for an initial consultation.