For well over a thousand years, families have incorporated the hotchpot clause into their estate planning .
It may be time for you to consider doing the same.
The hotchpot clause is a paragraph in your will that equalizes the distribution of your probate estate by taking into account gifts that you have made during your lifetime.
It is an excellent way to solve the dilemma felt by many parents who have been forced, by circumstance or guilt, to support one child to the detriment of their other children. The hotchpot clause gives them the chance to make up the difference through inheritance.
A hotchpot clause works by adding the gifted amounts back into the total inheritance pot, and then crediting the gift as an advance on the inheritance of the child.
A quick example. Suppose you have 5 children and a $1 million estate. You want to treat the children equally, so you decide that each child will receive 1/5 th , or $200,000, upon your death. Then one child experiences a sudden job loss and has an immediate need for money. Being a supportive parent, you give that child $50,000 without expecting repayment. It is a lifetime gift .
However, you feel it is unfair to your other 4 children that only one child should have such a big gift. You want to “true up” the money among all 5 children through the inheritance they will receive when you die.
The solution? You include a hotchpot clause in your will that states that the child who received the lifetime gift will have the gifted amount – $50,000 – deducted from that child’s share of the estate. When you die, the child who received the lifetime gift will only receive $150,000 from the estate, while the remaining 4 children will each receive $200,000.
The important point is that you document your intent, in writing, that you want to have the $50,000 gift counted against that child’s inheritance. If it is not documented, then the lifetime gift will have no effect on how your estate is divided.
If you do not want to mess with a clause in your will, then there are two other ways to achieve the same goal. The first is for you to declare in a separate writing that the gift was in satisfaction of the devise to that child in your will. You must do this at, or close to, the time that you make the gift.
The second way is for that child to acknowledge, in writing, that the $50,000 lifetime gift was in satisfaction of the devise in your will. This writing can be made at any time.
In Texas, this technique was originally a common-law doctrine known as “satisfaction of legacies.” It eventually achieved official status in a statute with the decidedly boring name of “Lifetime Gifts as Satisfaction of Devise.”
Can the same plan work if you do not have a will? Yes, provided you contemporaneously state, in writing, that the $50,000 lifetime gift is an advance against that child’s share of the estate, or that the $50,000 is to be considered in computing the division and distribution of your estate. The child can also admit, in writing, that the $50,000 was an advance against inheritance.
A hotchpot clause can be used for non-monetary gifts, too. The value placed on the gift will be the earlier of the date of receipt or death.
Used wisely, the hotchpot clause is a valuable tool for estate planning.
Are you looking for estate planning assistance? Schedule a consultation with one of the experienced attorneys at Hammerle Finley to discuss your options.
Virginia Hammerle is an attorney with Hammerle Finley Law Firm. She is entering her 40th year in the practice of law. She is Board Certified in Civil Trial Law by the Texas Board of Legal specialization. Contact legaltalktexas@hammerle.com to receive her firm’s newsletter.
