Hotchpot Clause: Ensuring your Children are treated equally in your Will
With the ever increasing prices of homes in the Greater Toronto Area many of our clients have decided to assist their children financially when their child decides to buy a home. Toronto Life recently ran an article called “The Bank of Mom and Dad” and from our experience this is becoming more and more true.
The article states that “Family money is, at least in part, the reason why the city has seen such an extraordinary real estate boom in the past decade”. When our clients come to us to draft their wills one of the first questions we ask them is whether they have gifted any funds to purchase real estate or made other inter vivos gifts (gifts made while alive).
The answer has increasingly becoming “yes”. One of the major concerns our clients have with the gift is that their other children won’t be treated equally if the other child or children don’t receive a gift before the parents die. In most cases our clients want to gift an equal amount of assets to each child whether during their lifetimes or on death. To this we answer them – we better insert a “Hotchpot Clause” in the Will.
What is a Hotchpot Clause?
A hotchpot clause is a method of ensuring an equal division of the estate among children by adjusting the share each of the children receive by the amount received by them prior to death. For example if Mr. and Mrs. Smith give $100,000.00 to their son Jon to purchase a house but their daughters Jane and Joan never receive an equivalent $100,000.00 prior to Mr. and Mrs. Smith’s death then the $100,000 is added to the estate for the purpose of determining each child’s share and is deducted from Jon’s share. So if the estate is worth $1,500,000.00, Jon will receive $433,333.33 and Jane and Joan will each receive $533,333.33.
What if your intention was that it was a loan and not a gift?
Families sometimes structure the “gift” to their children as a loan to avoid problems associated with divorce. For example if Jon divorces his wife the $100,000 would form part of the matrimonial home to which his wife would be entitled to 50% – if Mr. And Mrs. Smith wanted to prevent her from getting the 50% they could make a demand on the loan – notwithstanding that the parents intend the monies to be a loan and not a gift on divorce the court may still rule that it was a gift to be equally shared.
Assuming Jon and his wife don’t get divorced, at death the loan becomes a debt owing to the estate and is enforceable against Jon by the estate. A hotchpot clause can address this situation by forgiving/releasing the debt in the Will by bringing the debt into account by way of hotchpot. Alternatively, the Will can provide that the debt is forgiven on death.
As you can see a simple gift to your child is filled with complexity and must be considered when you meet with your lawyer to draft your Will. A hotchpot clause may be the answer to ensure that a gift given to a child while you are alive doesn’t mean that things will be unequal with your other children after your death. If you are looking to purchase a home or draft a Will please don’t hesitate to contact us.
Contact us for a FREE Consultation
Topics: Wills and Estate Planning