Many parents extend loans to their adult children without adequately considering or providing for how that loan is to be treated on the parent’s death.
Is the loan or amount advanced during the parent’s lifetime meant to be accounted for prior to that adult child taking their share of the parent’s estate, or is the loan meant to be forgiven and extinguished?
If the will-maker decides that the former applies, the lawyer drafting the will can include a ‘hotchpot’ clause.
Bringing loans or gifts made during a will-maker’s lifetime into ‘hotchpot’ means that the advances are notionally added to the estate to determine the estate’s value. When the residue is then divided among the beneficiaries, any advances received by that beneficiary are subtracted from their share. A hotchpot clause requires a beneficiary to account for any loan they received along with any repayments made against it, and it prevents the executor from distributing monies from the will-maker’s estate to that beneficiary until they do.
It can also serve to document the existence of such loans, bringing them to the attention of other beneficiaries (often siblings). Additional details can be provided in the will itself to clarify the will-maker’s intention for valuation, interest, and adjusting for inflation.
When a properly drafted hotchpot clause is combined with an up-to-date loan ledger and an in-the-loop executor, a will-maker can significantly reduce the likelihood of confusion when they are gone.
This article is intended for information purposes only and should not be taken as the provision of legal advice. Grace C. Cleveland is a lawyer with the law firm of Cleveland Doan LLP and can be reached at (604)536-5002 or firstname.lastname@example.org.