Estate Planning to Adjust for Lifetime Gifts to a Needy Heir
This year this blog is following a hypothetical couple (“John” and “Sue”) through their lives to see what role estate planning had on their family. To review prior blogs, go to SeamonLawOffices.com/Blog.
Our story follows a couple I refer to as “John” and “Sue”. We initially worked together to establish their estate plan when they were young parents, and we updated their plan as their children grew up and they adopted their nephew who had autism. Now, they were back at the office with a new concern. As you might recall, their daughter Mary hit a rough patch in her twenties, but now she is in her thirties, in a good marriage, has a secure job, and is living well within her means. But given the past, they are still a little reluctant to fully trust Mary’s decision-making and they are worried there could be hard feelings between Mary and her younger brother, John Jr., when he realizes just how much his parents spent on Mary over the years.
Most parents realize that not every child is the same. Some children might need more financial support while others might need more emotional support, but this support of Mary was a little different. Mary’s prior behavior resulted in quite a bit of financial support to such a significant level that John and Sue felt they should even things up a bit. They considered gifting Junior money now, but they worry they could need that money for their retirement.
I explained that we could incorporate language in their estate plan addressing the prior financial help as an advancement that essentially would be taken out of Mary’s inheritance. They were uncertain as to what that meant, so we used the following as an example. If their estate was worth $450,000 when they passed away and they gave Mary $50,000 during their lifetime as an advance on her inheritance, then when the estate is divided up, Junior would inherit $250,000 while Mary would only inherit $200,000 due to her previous gift that would be treated as an advance on her inheritance.
They liked that idea, but now they were worried about whether Mary would be upset when she found out that she was not getting the same inheritance as her brother. That question is a little more difficult, but in my experience, it is best to be honest with Mary now, while they are living and can have that discussion rather than it be a surprise for Mary after they die. If Mary chooses to do so, she could always repay them the advance while they are living to make the inheritances even again. I reminded them that the money they gifted to Mary was part of their savings, so in addition to the $50,000, they also lost the potential interest on that money. They hadn’t thought about that, but then Sue recalled reading about the Rule of 72 where a 10% annual return would double your initial investment every seven years. They did not want to consider that in their advancement language, but it did give them more confidence in their decision and in a future conversation with Mary to explain the decision.
Fortunately, the couple was relatively young and healthy when they gifted to Mary, but for seniors, giving away assets or using assets to pay for another person’s bills, may have serious consequences when it comes to long-term care (ie. nursing home) and Medicaid qualification. Senior citizens should discuss gifting plans with their elder law attorney prior to making such gifts.