Lifetime events relating to a person’s assets and family situation can materially affect how their estate is distributed when they die.
Consider lifetime gifts and loans by a parent to a child. A person’s trust or will may say that lifetime gifts and/or unpaid loans to a child shall be counted as advances against the child’s eventual inheritance. If the document is silent, however, lifetime gifts are not advances.
If they count, however, lifetime advances are first added back into the undistributed estate to compute the entire estate and determine each child’s proportionate share. The advance is then subtracted from the share of the enlarged estate of the child who received the advance.
While the explanation is straightforward, administration is more complicated. Disputes can arise over the amount and terms of such lifetime gifting and/or loans to be repaid. Records of each lifetime gift or loan should exist to avoid, or to limit, the dispute. The trust can refer to the lifetime gifts or loans and the type of on-going record keeping.
For example, a trust may say that the parent loaned the child $100,000 at 4% compound annual interest and say that the parent is keeping ongoing repayment records.
Sometimes a child loans a parent money to cover the parent’s necessary household expenses. If so, the child and parent should sign a written agreement detailing the terms of repayment. The loan might also be secured against the residence to give the child priority over unsecured creditors (e.g., credit card companies). Again, ongoing recordkeeping is important. Like all other debts, any unpaid balance is first repaid before the remaining balance of the estate is distributed amongst the beneficiaries.
Generally, if a specifically gifted asset – like real property — is sold while the owner is alive, and the owner’s trust (or will) is not updated to remove the gift, then the specific gift is, “adeemed”, i.e., revoked. Any unspent sale proceeds left in the decedent’s estate — after paying the decedent’s personal debts, taxes and the expenses of settling the decedent’s estate — is distributed with the balance of the estate. The distribution of the balance of the estate – called the residue — may or may not mirror how the specific gift was to be distributed.
However, when specifically gifted property is sold on behalf of an incapacitated person while alive — by an agent under a power of attorney, a conservator, or the trustee of the person’s trust – then, generally, the death beneficiary is entitled to a gift of money equal to the net sale price of the property sold unreduced by any encumbrance to be paid off (e.g., mortgage).
Next, if the property being specifically gifted was destroyed, condemned, sold, or foreclosed, as relevant, then the beneficiary is entitled to receive the undistributed insurance proceeds, condemnation award, the sales payment, or any property acquired as a result (or in lieu of) foreclosure, as relevant, still owed to the decedent. For example, if the decedent’s residence was destroyed by fire then the intended death beneficiary is entitled to the unpaid insurance proceeds.
Also, intervening births, marriages, deaths and divorces can affect the distribution of a person’s estate generally, and specific gifts too. Thus, an estate plan is then revisited to address major lifetime events if existing documents did not address these eventualities.
Staying current with one’s estate planning is necessary. Events between when one signed one’s living trust and when one dies may affect the planned distribution of assets in unintended and unforeseen ways. As a rule of thumb, it is good practice to review one’s estate plan every five years, and sooner when major events occur.
Dennis A. Fordham, Attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at dennis@DennisFordhamLaw.com and 707-263-3235.