Today’s blog was written by Courtney Lanthier, Law Clerk at Fasken LLP

With prices of basically everything going up these days, it is becoming more difficult for the younger generations (myself included) to be able to afford most things, including those big ticket items like cars and homes. The sad reality is, while our parents may have been able to afford a home at 25, today that is not always the case.

In some instances, parents may be stepping in to assist their children with such purchases by providing loans or gifts to them throughout their lifetime. But what happens to these amounts when the parents pass away? And if there are multiple children, how can they ensure that their children are all being treated equally? The simplest answer to these questions is including language in their Will to ensure that these loans and/or gifts are not forgotten when they are no longer around.

This approach can take a few different directions, so some important questions to ask and points to consider during discussions with clients may include:

1. Have they loaned or gifted money to a child (or children), or do they intend to in the future?

It is important to differentiate if the funds provided were intended as a loan or a gift as there are different provisions to be included in the Wills for these different situations.

2. If there have already been loans or gifts, have they been documented?

This is especially important if the client is intending to equalize any amounts provided to children in their Will (see point #4). The executor administering the estate will need to know exactly what amounts, if any, have been gifted and to whom. The documentation can be as simple as an ongoing spreadsheet, handwritten note or an e-mail to the lawyer holding the original documents to be kept in their file. If these amounts aren’t documented, it could cause issues or friction among the children when it comes time to administer the estate.

For a loan, such amounts should be documented in a formal manner, such as a promissory note or an acknowledgement signed by both parties.

3. If the funds provided were intended as a loan, will it be forgiven on death?

Language will need to be included in the Will in either case – if the loan is to be forgiven on death, a provision should be added to this effect that clearly indicates that the testator has extended loan(s) to a child or children, they forgive all amounts owing at the date of their death, and the trustees should cancel any promissory note/loan document and deliver a copy of same to the child or children.

Similarly, if the loan is not to be forgiven, language can be included to say that such loans should be collected on the death of the testator and set out any particulars of the loans (i.e. the amount of the original loan and whether it is secured or unsecured).

If the client has a spouse, confirm with the client if the loan is intended to be forgiven or collected on the client’s death or if the loan will be passed to the client’s spouse and forgiven or collected, as the case may be, on the death of the spouse. This will impact the language used and the placement of the relevant provisions in the Will.

4. If the funds provided were intended as a gift or if the loan is forgiven, should the funds be equalized among the other beneficiaries?

This is one of the more common approaches when there are multiple children who have received different gifts and loans and the testator wants to ensure a fair and equal distribution of their estate.

In this scenario, a “hotchpot” clause would be included in the Will. This clause aims to create fairness by equalizing all amounts (or limited to more substantial amounts) provided to children during the testator’s lifetime. When it comes time to divide the estate, the trustee will include the value of all of such gifts and/or the value of loans that are forgiven in order to determine the total value of the estate. Once the total is determined, it will be divided in accordance with the provisions of the Will. Then, the value of any gifts received by a child will be subtracted from their total share. Therefore, a child who received a gift during the testator’s lifetime will get a smaller portion at the time of division of the estate then a child who did not receive a gift, and similarly a child who received a gift of greater value during the testator’s lifetime will get a smaller portion on the division of the estate then a child who received a gift of lesser value. These clauses can effectively create a fair and equal distribution among the testator’s children.

As noted in point #2, this is why documenting these gifts is so important – the trustee will be able to easily compile all amounts made during the testator’s lifetime therefore reducing the likelihood of issues and confusion arising when administering the estate.

While I don’t foresee prices decreasing much in the coming years, these types of questions may become more and more important when approaching a client’s estate plan. Even though each client is different and an estate plan is unique to each individual, this list can help guide more in depth discussions when dealing with loans and gifts made to children.