Much of estate planning is built around how best to use assets accumulated during life to benefit future generations and other dependents. However, what happens if one of your beneficiaries needs assets during your lifetime? The fact that your beneficiary will inherit $100,000 at some point in the future is little comfort in the face of a current job loss, health issue or other crisis. You may want to help now but if you decide to provide funds as an advance on inheritance, it is important to consider how it affects the rest of your estate plan.
Giving a beneficiary an advance on his or her inheritance can be complicated when all or a portion of your estate is given to a group of beneficiaries “in equal shares.” To avoid distorting your intended estate plan, you may need to take additional steps to account for a gift to only one of those beneficiaries.
For example, your will leaves your estate, valued at $200,000 “in equal shares” to your two children. Child 1 loses his job, and you make a gift of the $100,000 that Child 1 would otherwise inherit at your death. If you do not take steps to modify your estate planning documents after that gift, what happens when you die? The default rule is that at your death, the remaining $100,000 would be divided equally between your two children, with each child inheriting $50,000. The result would be that Child 1 would have received $150,000 from you, while Child 2 would only receive $50,000. If that’s not the result you want, you must update your estate plan.
One option is to modify your will to leave Child 2 an amount equal to what you gave Child 1 (i.e., $100,000) and then distribute anything left in your estate after that “in equal shares” between your children.
Another possibility is to document the $100,000 transfer made to Child 1 during your life as an “advancement” as required by Section 2-1.5 of New York’s Estates Powers & Trust Law. Under the law, an advancement must be documented by a “contemporaneous writing” signed by either the donor indicating the gift was intended as an advancement, or by the donee (i.e. the gift recipient) acknowledging that it was intended to be an advancement. The writing is not required to be signed by both parties to the gift.
Where advancement is shown, the value of the gift is added back to the estate. If the value of the advance is greater than the recipient’s interest in the estate, then the recipient receives nothing from the estate and is not required to pay back the excess amount received in this scenario. However, if the value of the recipient’s interest in the estate is greater than the value of the advance, the recipient receives his or her interest in the estate less the amount of the advance.
Importantly, if the advance is an appreciating asset (ex. stock, land, etc.), the advanced asset is valued at the estate tax value (i.e., the value at the date of death), not the date of gift value (unless the contemporaneous writing provides otherwise).
A wide array of circumstances can affect your estate plan. Even after estate planning documents are executed, it is important to consult with a lawyer on major developments, including the making of significant gifts. If you need help with your estate plan, contact one of our attorneys for assistance.