There are hundreds of children’s books about fairness. Anyone who has spent any time in the company of children appreciates how important it is to them that people, and especially parents, act fairly. While some families’ circumstances leave no option for some children to be treated differently than others, for the majority of them any preferential treatment can lead to unfriendly, or even hostile, sibling relationships.
As a result, the obvious choice for most testators hoping to avoid a family fight is to divide the residue of their estate equally among their beneficiaries. But, it may be that, even in that circumstance, the result isn’t equal. If any money was lent or gifted to a child during the testator’s lifetime, then the result may be that the children are not treated fairly at all.
For example, if the deceased died with an estate worth $2 million and her Will divided the residue equally among her four children, then each beneficiary would receive $500,000. But if one of her children had borrowed $250,000 from her, and the funds were not repaid, then the reality is that three children will each receive $500,000 and one will receive $750,000.
A useful estate planning tool to address this situation is the hotchpot clause. For those unfamiliar with the term, bringing loans or gifts made during a testator’s lifetime “into hotchpot” means that the advances are notionally added to the estate in order to determine the estate’s value. When the residue is then divided among the beneficiaries, any advances received by that beneficiary are subtracted from his or her share.