By: Randall A. Denha, Esq.
Sometimes parents feel compelled to make gifts to only some of their children. While reasons may differ, one thing is clear: parents love all their children equally. Each child may “need” the gift more than their other children which is often the reason the parent will make a gift. Maybe the child is a public school teacher (not a doctor or venture capitalist like his siblings). Or maybe the child started a business which has now failed (through no fault of the child’s).
If you are going to make unequal lifetime gifts to your children, then you need to think about how this is going to affect the handling of your estate/trust at your death. The first question is, do you want gifts counted against each child? The relevant legal term here is “advancement.” Basically, you are deciding whether to treat a lifetime gift as an advancement of the child’s inheritance. Doing so means that you would add the child’s gift back into your estate/trust, and consider the child as already having received it. The following is an example:
John Cally, a widower, has five children and an estate of $4.5 million. One child (Donny) got a $500,000 gift from John during his life, to cover Donny’s gambling debts. No other children received lifetime gifts, but John wants to divide his estate “equally” upon his death.
In this example, John has three options:
1. Treat his estate as having a value of $4.5 million, with each child getting $900,000. In other words, ignore the lifetime gift to Donny, and don’t treat it as an advancement. That results in Donny getting $1.4 million of the $5 million total (or 28%).
2. Treat his estate as having a value of $5 million, with each child getting $1,000,000. Donny received an advancement of $500,000, so he gets “only” another $500,000 at John’s death. The four other children each get $1 million at John’s death.
3. Treat his estate as having a value of $4.5 million plus $500,000 plus some amount of interest on the $500,000 from the time it was given until John’s death. After all, we know that, because of the time value of money, $500,000 today is worth more than $500,000 in 20 or 30 years. This might result in a deemed estate value of $5.2 million, with Donny then being considered to have received an advancement of $700,000 ($500,000 plus $200,000 in interest). Donny gets another $340,000 and the four other children each get $1.04 million at John’s death (25% of the remaining $4.16 million after Donny’s gift at John’s death).
Assuming you decide to treat the gift as an advancement, the next question is: how do you memorialize this fact? The best thing to do is to have a written agreement. In it, you make reference to the amount of the gift and the fact that the gift is intended to be an advancement. You (the gift giver) sign the advancement agreement, and so does the person receiving the gift. This is a sort of “belt and suspenders” approach, as Michigan law (MCLA 700.2109 of the Estates and Protected Individuals Code) states that a gift is not an advancement unless either of the following exists: (a) The decedent declared in a contemporaneous writing or the heir acknowledged in writing that the gift is an advancement; OR (b) The decedent’s contemporaneous writing or the heir’s written acknowledgment otherwise indicates that the gift is to be taken into account in computing the division and distribution of the decedent’s intestate estate.
Even though the law seems to require only one or the other, I still like a writing AND an acknowledgement. Listing the value of the advancement may also be a good idea. This is also consistent with MCLA 700.2109:
“…property advanced is valued as of the time the heir came into possession or enjoyment of the property or as of the time of the decedent’s death, whichever first occurs.”
So before you gift property and elect to treat it as an advancement, be sure to provide a written advancement form signed by the child so that a writing is in place to avoid any hard feelings at a later time between family members or a family feud over unfairness in dividing the estate assets.