Gifts to Children
Children are usually the first in line to inherit the wealth of their parents after they have both died. However, there are 2 things to consider when gifting to children: do inter vivos gifts count against their claim on their parent's estate, and how will property be conveyed to minor children, since minors do not have the legal capacity to own property.
Advancements are gifts to children during the donor's lifetime that may count as their share either under intestacy or their bequest under the donor's will. That such inter vivos gifts should be considered an advancement arises from the general supposition that a parent loves all his children equally, and, hence, would want them to receive an equal share of the parent's wealth.
Under common law, there was an irrebuttable presumption that an inter vivos gift is an advancement on a child's share of the estate. The children's share of the estate is determined by pooling all the estate property that is bequeathed to the children and adding the value of all advancements to create a hotchpot, then dividing the hotchpot equally among the children. If a child predeceases both parents, then the child's issue will receive the child's portion of the hotchpot. If the child had no issue, then the hotchpot is divided equally among the survivors. If the advancement to any child exceeds her share, then she will not receive anything from the estate, but she will not have to return any excess of her advancement.
Example: Advancements to Children and Calculating Shares Using a Hotchpot
Mary dies intestate with no surviving spouse, 3 surviving child — Richard, Christine, and Holly — and 2 grandchildren from a deceased child, Michael, leaving a $500,000 estate. While Mary was still alive, she gave Rich $300,000 and the other 2 surviving children $100,000 each. The shares going to Mary's issue are calculated using the hotchpot.
- Add the value of the inter vivos gifts to the estate: $300,000 + $100,000 + $100,000 + $500,000 = $1,000,000.
- Divide the hotchpot by the number of children who either survived or have surviving issue, which in Mary's case is 4: $1,000,000 / 4 = $250,000.
- Since Rich already got $300,000, he gets to keep it, but he gets no more from the estate. So the $700,000 remaining in the hotchpot is divided by 3: $700,000 / 3 = $233,333.33.
- Since Christine and Holly already got $100,000, they each receive $133,333.33: $233,333.33 - $100,000 = $133,333.33.
- Since Michael is deceased, his 2 children split the $233,333.33 that Michael would have received from the estate if he had survived.
A major criticism of treating inter vivos gifts as advancements is that it often led to fighting among the siblings about who had gotten what and the value of the gifts, which often lead to costly court fights.
The modern trend, as expressed in the Uniform Probate Code (UPC §2-109), differs from common law in several ways:
- Inter vivos gifts are not treated as an advancement unless there is writing that specifically states that such gifts are to be counted as contributions to the child's share of the estate.
- If the writing was made by the donor, then it must have been written contemporaneously with the inter vivos gift;
- however, the donee can create the writing at any time.
- If the donee predeceases the donor, then the donee's issue are still entitled to the donee's share. No inter vivos gifts to the donee will count against the share for the donee's issue unless it is in writing.
- The UPC approach applies not only to the issue of the decedent, but also to any beneficiary.
- Since a gift can change value over time, the valuation of the inter vivos gift is determined at the earlier of when the donee either received or enjoyed the gift or at the death of the donor.
Transfers to Minors
Because a minor does not have the legal capacity to own property, devisements cannot be directly transferred to minors. There are 4 main methods by which property can be transferred to a minor:
- Two methods that are created under intestacy, depending on the jurisdiction:
- Two methods that require a written instrument:
- custodianships under the Uniform Gifts or Transfers to Minors Act
A property guardian is an adult who protects the property until the minor reaches the age of majority, in which case, the property is transferred to the beneficiary. Usually, the guardian is also a personal guardian of the minor, but sometimes the property guardian is someone other than the personal guardian. The guardian cannot sell any property without court approval — only income from the property can be used to support the child. Because the guardian must go to court to do anything with the property and to periodically give an accounting of the property, major expenses are incurred as long the child is a minor.
Under a conservatorship, the conservator takes title to the property as a trustee, which eliminates the need to get court approval to sell or otherwise dispose of the property. However, the conservator still must give an accounting of the property to the court every year.
The Uniform Transfers to Minors Act, which superseded the Uniform Gifts to Minors Act, extended the role of the guardian in the form of a custodian by allowing the custodian to act in the best interests of the minor without seeking court approval. The custodian's duty is to the child, not the court. The custodian has title to the property as trustee, but the custodian must transfer all property to the child when the child reaches a statutory age specified by state law, but usually ranges from 18 - 21. The custodianship is most appropriate for small estates, since administration costs are lower than for a guardianship, conservatorship, or a trust, and is simpler to set up than a trust. However, if there is any possibility that the donor will be subject to estate tax, then the donor who makes a gift to a child should not be the custodian, because if the donor dies before the child reaches the age of majority, then the gift will be includable in the estate of the donor.
A trust is most appropriate for large estates, especially if the testator wants more control over the distribution of the estate than provided by the other methods. The trust is created with a trust document where the grantor of the trust can specify the duties and powers of the trustee, and how the property should be doled out to his children and other beneficiaries. The major costs of a trust are its creation and the trustee's fees.
A custodianship or trust requires written documents for their establishment, so if the last surviving parent does not specify either, then the court will either appoint a guardian or a conservator, depending on the jurisdiction. Usually, a close relative will be appointed.