Advance of inheritance

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Grandma has an estate of about $3M, primarily IRA.  She has 3 sons, equal beneficiaries.  Her $1M house is owned by the sons (jn an LLC), and there is a $2M life insurance policy in a trust for the sons.  So, the sons stand to inherit upwards of $2M each from Grandma.

One of the sons has "borrowed" money from Grandma for his own kid's tuition.  It is intended to be an advance on his inheritance.  We're trying to draft some sort of promissory note to acknowledge that advance.  We also want the grandson "on the hook" if Dad dies before Grandma.  Any suggestions or advice?

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Or, one generation saves, and so does the next generation except for one who is unable to save for certain reasons.  In ... (more)

RBirns (Feb. 02, 2017 @ 2:00p) |

Jstic wasn't implying that you had a sleazeball, but you NEVER KNOW after your mom dies.
Memory is a fickle thing, and yo... (more)

forbin4040 (Feb. 02, 2017 @ 2:06p) |

Exactly, I was only making note of my circumstance, didn't mean to imply that OP's situation is a con or something nefar... (more)

Jstic (Feb. 02, 2017 @ 3:26p) |

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I hope I get to be rich enough to have people fighting over my money before I die. But then I remember that I grew up very poor, and my poor family all had the same fights.

/If i make it that far, I'll probably understand the point of this though.

With that level of money, I'd get a formal legal document drafted by a real lawyer, not a fatwallet "IANAL". Everyone is playing nice now, but obviously there is at least one son who can't afford to pay for their kids college, so that means there is a higher chance of someone causing a stink. I know it's family- but those can be the worst fights. My advice to Grandma is to live it up (H&B) and spend all that money ASAP.

So is OP the grandma, the prodigal son, one of the other two sons, or the grandson getting a degree in uwbw?

How much are we talking about with regards to the "advance"?  If it's big bucks, then yes, it may be advisable to treat it as a loan & get a legit promissory note (complete with repayment terms & interest rate).  If it's not that much, it may be easier and more cost effective to have grandma gift an equal amount to each son now to even them out.

raringvt said:   How much are we talking about with regards to the "advance"?  If it's big bucks, then yes, it may be advisable to treat it as a loan & get a legit promissory note.  If it's not that much, it may be easier and more cost effective to have grandma gift an equal amount to each son now to even them out.
  
Advance will be well over 100k, maybe 200k.  There will likely be another advance for his second kid still in high school.  One of the other brothers might also do the same for his kids down the road.

RBirns said:   
  One of the other brothers might also do the same for his kids down the road.

  looks like we got two prodigal sons!

rufflesinc said:   
RBirns said:   
  One of the other brothers might also do the same for his kids down the road.

  looks like we got two prodigal sons!

  
Fortunately the OP's kids are already professional uwbw.

Shit happens...It really depends on how much you want to protect your future estate versus pissing off your brothers.

Can't Grandma just update the will with some language to include: Johny gets 1/3 of estate minus (funds for education).

Of course, you need to limit how much they extract because once you start doing it..they will just keep coming back for more...sure would be nice to have a house on the lake..and they are Grandma's favorite

What if the house or markets crash, and they have pulled out more than 1/3 of the estate.

drew2money said:   Shit happens...It really depends on how much you want to protect your future estate versus pissing off your brothers.

Can't Grandma just update the will with some language to include: Johny gets 1/3 of estate minus (funds for education).

Of course, you need to limit how much they extract because once you start doing it..they will just keep coming back for more...sure would be nice to have a house on the lake..and they are Grandma's favorite

What if the house or markets crash, and they have pulled out more than 1/3 of the estate.

  
Can't grandma just update the will?  She could, but if remaining estate at her death is low there could be shortfall.  The life insurance will be there, but that's outside the estate.  Essentially the life insurance proceeds will be used to repay the advance.

This is not Grandma's ATM, no coming back for more to buy that lake house.  Just Grandma trying to help with her grandkids' college.

raringvt said:   have grandma gift an equal amount to each son now to even them out.
 

  
This might not be ideal due to the tax treatment of the retirement account distributions, but if it is possible it would be a very good option. It would eat into grandma's lifetime gift limit, but with the amounts concerned I don't think that's a problem.

doveroftke said:   
raringvt said:   have grandma gift an equal amount to each son now to even them out.
  
This might not be ideal due to the tax treatment of the retirement account distributions, but if it is possible it would be a very good option. It would eat into grandma's lifetime gift limit, but with the amounts concerned I don't think that's a problem.

  
Exactly.  Such gifting would require IRA withdrawals beyond RMD to come up with the money.  

Why not just adjust the life insurance to cover this? No more documents to handle than before.

One problem of changing the will to subtract the amount given to a specific heir early is that it will be hard to account for inflation and opportunity cost (growth of money gifted if it had stayed in IRA account). If grandma lives another 20 years, it'd be a recipe for legal challenge to the will if you do not factor in inflation and return of investment on IRA.

So IMO the best option would be to give equal amounts to each heir. That takes care of the subtraction of 2017 dollar amounts in the will. And distribution doesn't have to be all in one lumpsum either since education costs are not gonna be all paid at once which ensures that if a grandkid drops out, excess money is not given out needlessly.

RBirns said:   
doveroftke said:   
raringvt said:   have grandma gift an equal amount to each son now to even them out.
  
This might not be ideal due to the tax treatment of the retirement account distributions, but if it is possible it would be a very good option. It would eat into grandma's lifetime gift limit, but with the amounts concerned I don't think that's a problem.

  
Exactly.  Such gifting would require IRA withdrawals beyond RMD to come up with the money.  

  Adjust the life insurance beneficiary percentages accordingly.  Instead of 33.3% for each, after a $100k "advance" adjust it to 30% ($600k) for that son and 35% ($700k) for each of the other two.

What does grandma think?

Its her money.

eta: my point being that grandma might not consider this loan for tuition to be part of the inheritance but instead money she's loaning / gifting to her grandkids outside money destined for her kids.
 

jerosen said:   What does grandma think?

Its her money.

eta: my point being that grandma might not consider this loan for tuition to be part of the inheritance but instead money she's loaning / gifting to her grandkids outside money destined for her kids.

  True that. Heaven forbid someone who is alive spend their money how they'd like it. Too quickly people start smelling inheritance blood and start circling. If my kids/grandkids start fighting over  'their inheritance' money I'm gonna give it all away to charity.

Glitch99 said:   
RBirns said:   
doveroftke said:   
raringvt said:   have grandma gift an equal amount to each son now to even them out.
  
This might not be ideal due to the tax treatment of the retirement account distributions, but if it is possible it would be a very good option. It would eat into grandma's lifetime gift limit, but with the amounts concerned I don't think that's a problem.

  
Exactly.  Such gifting would require IRA withdrawals beyond RMD to come up with the money.  

  Adjust the life insurance beneficiary percentages accordingly.  Instead of 33.3% for each, after a $100k "advance" adjust it to 30% ($600k) for that son and 35% ($700k) for each of the other two.

  
That could be done, but still need some note or document where parties agree to it and confirm the amounts.  The policy beneficiary is the trust, so the trustee could adjust the distributions to each son.  

jerosen said:   What does grandma think?

Its her money.

eta: my point being that grandma might not consider this loan for tuition to be part of the inheritance but instead money she's loaning / gifting to her grandkids outside money destined for her kids.

  
Grandma is the one who wants it to be part of inheritance.

If it's over the annual gift limit, won't there be taxes due?  Unless she's paying directly for the tuition.

As somebody who is also in a trust with a sometimes adversarial and always not financially responsible sibling, I would say that deferring the  "advance" for the others is a bad bad idea.  If she's going to give a gift to one, give the exact same gift to all at the same time. 

RBirns said:   
jerosen said:   What does grandma think?

Its her money.

eta: my point being that grandma might not consider this loan for tuition to be part of the inheritance but instead money she's loaning / gifting to her grandkids outside money destined for her kids.

  
Grandma is the one who wants it to be part of inheritance.

  
OK good.

Grandma should consult an estate planner / attorney.    

They can help her make sure everything is set up correctly and the will is up to date and the loan is accounted for legally so people can't challenge anything.    They can also help her minimize the cost or problems with probate or estate taxes, if that hasn't been done or the planning is out of date.
 

$6m and no one wants to spend $1000 bucks to have an estate planning attorney draft up a doc that will set things in stone and prevent a future lawsuit?

bluegreenturtle said:   If it's over the annual gift limit, won't there be taxes due?  Unless she's paying directly for the tuition.

...

  

Gift taxes aren't due until you've gifted more than the estate tax exemption.   Thats $5.49M now.

If she gifts more than the exemption she has to file a tax form to record it.   No taxes due until that $5.49M amount is hit.   OP's Grandma's estate isn't that large it sounds.

 

bluegreenturtle said:   If it's over the annual gift limit, won't there be taxes due?  Unless she's paying directly for the tuition.

As somebody who is also in a trust with a sometimes adversarial and always not financially responsible sibling, I would say that deferring the  "advance" for the others is a bad bad idea.  If she's going to give a gift to one, give the exact same gift to all at the same time. 

  
Not if it's a loan

Ok, well regardless, having faced some of this, I would highly advise the grandma not to make gifts that are not exactly equal to all inheritors, at the same time.  The loan thing is just borrowing trouble.  Either give a gift to a family member, or do not. 

bluegreenturtle said:   Ok, well regardless, having faced some of this, I would highly advise the grandma not to make gifts that are not exactly equal to all inheritors, at the same time.  The loan thing is just borrowing trouble.  Either give a gift to a family member, or do not. 
  
Having faced some of this, what trouble did you encounter?

Grandma needs to get an attorney to draw up legal paperwork with her specific instructions.

Alternatively, If she doesn't need the funds for day-to-day living and wants to keep everything 100% even among her children (which some mothers do, mine certainly does, down to the penny sometimes), have her open 3 accounts, naming one of each Son as the sole beneficiary per account.  Then put the same amount of funds into each.  Grandma is still the gatekeeper (check writer) but If Son1 spends all the funds on his kids collage and Son2 spends 1/2 and Son3 spends none, when Grandma passes, the funds will just go to the beneficiaries directly and be outside the main estate, no arguing and fighting and no one Son knows what the other two had left/used.

Who's the trustee? Have something written up instructing them. Done

forbin4040 said:   Who's the trustee? Have something written up instructing them. Done
Unless one of the three sons is the trustee and decides to either not follow or follow the instructions based on which one got the loan, who is fighting with who, etc.

As the trustee of my mothers estate and having two brothers myself, I would tell my mother to NEVER put me in a position where I had to make a judgement call about something like this, because even if I thought I was being 100% fair, my siblings or their spouses, or kids might not.

Things can get really really weird when a parent dies and money is involved!

I have seen the nicest families ruined over conditions like this . Get a lawyer! Now!

AverageGuy09 said:   Grandma needs to get an attorney to draw up legal paperwork with her specific instructions.

Alternatively, If she doesn't need the funds for day-to-day living and wants to keep everything 100% even among her children (which some mothers do, mine certainly does, down to the penny sometimes), have her open 3 accounts, naming one of each Son as the sole beneficiary per account.  Then put the same amount of funds into each.  Grandma is still the gatekeeper (check writer) but If Son1 spends all the funds on his kids collage and Son2 spends 1/2 and Son3 spends none, when Grandma passes, the funds will just go to the beneficiaries directly and be outside the main estate, no arguing and fighting and no one Son knows what the other two had left/used.

  
Maybe the most interesting idea yet.  "Carve out" 3 separate IRA's of, say, 200k each.  Each son is sole beneficiary of one account.  Still grandma's money.  Money for grandkids' college is withdrawn from the applicable son's account.  Any further RMD for the year comes out of the "main" IRA.  Thoughts?

RBirns said:   One of the sons has "borrowed" money from Grandma for his own kid's tuition.  It is intended to be an advance on his inheritance.  We're trying to draft some sort of promissory note to acknowledge that advance. 
  Shouldn't this have been done at the time it was borrowed?

AverageGuy09 said:   
forbin4040 said:   Who's the trustee? Have something written up instructing them. Done
Unless one of the three sons is the trustee and decides to either not follow or follow the instructions based on which one got the loan, who is fighting with who, etc.

As the trustee of my mothers estate and having two brothers myself, I would tell my mother to NEVER put me in a position where I had to make a judgement call about something like this, because even if I thought I was being 100% fair, my siblings or their spouses, or kids might not.

Things can get really really weird when a parent dies and money is involved!

  
That's why we want everything documented, no judgement call.

Why would you need more than a simple loan agreement? If grandma passes, the loan would be property of the estate and would be withheld from his portion of the inheritance.

atikovi said:   
RBirns said:   One of the sons has "borrowed" money from Grandma for his own kid's tuition.  It is intended to be an advance on his inheritance.  We're trying to draft some sort of promissory note to acknowledge that advance.
  Shouldn't this have been done at the time it was borrowed?

  
Ideally yes, but there was a time crunch to pay tuition after financial aid offer.  It was basically mom can you help, of course, we'll work it out later.

supersnoop00 said:   Why would you need more than a simple loan agreement? If grandma passes, the loan would be property of the estate and would be withheld from his portion of the inheritance.
  
It wouldn't really be more than a simple loan agreement, except for some provision having the grandson on the hook if Dad predeceases Grandma.

RBirns said:   
Glitch99 said:   
RBirns said:   
doveroftke said:   
raringvt said:   have grandma gift an equal amount to each son now to even them out.
  
This might not be ideal due to the tax treatment of the retirement account distributions, but if it is possible it would be a very good option. It would eat into grandma's lifetime gift limit, but with the amounts concerned I don't think that's a problem.

  
Exactly.  Such gifting would require IRA withdrawals beyond RMD to come up with the money.  

  Adjust the life insurance beneficiary percentages accordingly.  Instead of 33.3% for each, after a $100k "advance" adjust it to 30% ($600k) for that son and 35% ($700k) for each of the other two.

  
That could be done, but still need some note or document where parties agree to it and confirm the amounts.  The policy beneficiary is the trust, so the trustee could adjust the distributions to each son.  

  Why is a life insurance beneficiary a trust?  

RBirns said:   
supersnoop00 said:   Why would you need more than a simple loan agreement? If grandma passes, the loan would be property of the estate and would be withheld from his portion of the inheritance.
  
It wouldn't really be more than a simple loan agreement, except for some provision having the grandson on the hook if Dad predeceases Grandma.

  Wouldn't the grandson be the borrower?  He will owe grandma's estate the money no matter who dies when.

Glitch99 said:   
RBirns said:   
Glitch99 said:   
RBirns said:   
doveroftke said:   
raringvt said:   have grandma gift an equal amount to each son now to even them out.
  
This might not be ideal due to the tax treatment of the retirement account distributions, but if it is possible it would be a very good option. It would eat into grandma's lifetime gift limit, but with the amounts concerned I don't think that's a problem.

  
Exactly.  Such gifting would require IRA withdrawals beyond RMD to come up with the money.  

  Adjust the life insurance beneficiary percentages accordingly.  Instead of 33.3% for each, after a $100k "advance" adjust it to 30% ($600k) for that son and 35% ($700k) for each of the other two.

  
That could be done, but still need some note or document where parties agree to it and confirm the amounts.  The policy beneficiary is the trust, so the trustee could adjust the distributions to each son.  

  Why is a life insurance beneficiary a trust?  

  
Owner and beneficiary is an irrevocable life insurance trust.  Keeps proceeds out of taxable estate.

Skipping 28 Messages...
forbin4040 said:   
RBirns said:   
Jstic said:   I have a sleazeball brother who did the same thing with my parents. He conned them into an advance on his inheritance so he could buy a big house that he can't afford to live in. My father was on his death bed so he gave in easily(this is a man who would NEVER have done this if he was in his right mind).

Two other brothers, including myself insisted that my mother ammend the will to stipulate that the amount for the advance be deducted from any portion of the estate that was willed to Mr. Sleaze.

And no, I don't give a rat's behind what my brother or any of my other siblings who took his side think of me. Family is family, but right is right, and wrong is wrong. And this was VERY wrong and should NEVER have happened.

OP, I would suggest you ask your parents to do the same, modify the will and get these "advances" in writing. You will regret it if you don't.

  
Well, I get it, but in our case this isn't a sleazeball situation.  Nobody is conning anyone, we're all on board and amenable to whatever "protections" are needed or taken.

Jstic wasn't implying that you had a sleazeball, but you NEVER KNOW after your mom dies.
Memory is a fickle thing, and you write things down now to prevent any 'memory lapses later'  

  Exactly, I was only making note of my circumstance, didn't mean to imply that OP's situation is a con or something nefarious. Even if you agree with the "advance" and it is for a good cause, OP should try to get  parent(s) to amend the will. OP probably has a nice family with the best of intentions, but a lot of people said that about my older brother, who's only interest in my parents before and after they die is their money. Money makes people do things they ordinarily wouldn't.



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