Friday, 19 June 2015

Making substantial gifts to children: How this might affect their inheritance

Private Client Solicitors in Hertford
Article by Chris Lucas
You may be interested to know that if you make a particular type of gift to one or more of your children during your lifetime, this could affect your children’s inheritance under the terms of your will.

The type of gift referred to here is known as a ‘portion’. A portion can be described as a substantial gift (usually of money) from a parent to a child which is made with the intention of establishing the child in life or making permanent provision for them.

A typical example of a portion would be giving one of your children a sum of money to be used as a deposit towards buying their first home. Whatever the gift might be, the key requirements for it to be considered a portion are as follows:
  1. The gift must be from a parent (or a person acting in loco parentis i.e. someone who has assumed parental responsibility) to a child.
  2. The gift must be substantial in value - what ‘substantial’ means will depend on the circumstances and can be open to interpretation, but generally speaking, any gift of £20,000 or more is most likely to be considered substantial.
  3. The gift must have the effect of establishing the child in life or making permanent provision for them e.g. deposit for a first home or sum of money to enable the child to start up their own business.
If you have already made a will, then it is important to be aware of the potential effect of portions when you subsequently pass away. Essentially, any portions made during your lifetime after you have made your will can have the effect of ‘satisfying’ legacies left to your children under the terms of your will. This is known as the presumption against double portions.

For example: you have three children, Sam, Edward and Jane. You make a will in April 2015 leaving your residuary estate to the three of them in equal shares. In July 2016, you give Sam £30,000 as a gift for him to put towards buying his first flat. You pass away May 2018, having made no other gifts to your children, with a residuary estate worth £300,000.

Based on the terms of your will alone, your children would be entitled to receive £100,000 each (£300,000 ÷ 3 = £100,000). However, the gift of £30,000 is likely to be considered a portion as it was a substantial sum of money which was gifted to Sam with the purpose of establishing him in life etc. The portion would therefore be deemed to satisfy part of the legacy to Sam under the will and this should be taken into account when your estate is divided between your children.

To work out the amounts each of your children would receive, your personal representatives would need to add the value of the portion to the value of the estate (£30,000 + £300,000 = £330,000) then divide this sum accordingly (£330,000 ÷ 3 = £110,000) to take the portion into account, so each child in this scenario would be entitled to £110,000. This would mean that Edward and Jane would each receive the full sum of £110,000 and Sam would receive £80,000 (having already received the gift of £30,000).

Unfortunately, it is not always as straightforward as the above example, as it can sometimes be difficult to establish whether or not a gift should be considered a portion. For example, there could be some disagreement over whether a gift of £5,000 could be considered as ‘substantial’. Also, the value of money changes over time with inflation so this may need to be taken into account, particularly if the gift in question was made a very long time ago.

It is important to note that the presumption against double portions can be defeated if a contrary intention is expressed by the person making the gift. For example, you could have a clause in your will stating that any portions made in your lifetime following the making of your will are to be completely disregarded. Alternatively, when making a gift to your child, you could express at the time of the gift (preferably in writing) that the gift is not to be taken into account for the purposes of their entitlement under your will. Of course, whether you would want to do this would depend on the nature of the gift, your individual circumstances and your wishes.

If you have made any significant gifts to your children since last updating your will, it may be a good idea to consider reviewing your will just to make sure that the position is clear. This is because if there are any disputes over the gifts and whether they should be taken into account as portions, this could potentially cause stress for your family and slow down the administration of the estate.

At Garden House Solicitors, we offer a free will review service for anybody wishing to review the terms of their will.

If you have any concerns about any of the above issues and/or would like to discuss your will, feel free to contact Chris Lucas by telephone on 01992 422 128 or by email at chris@ghslaw.co.uk

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Tel: 01992 422 128
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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