Want to Give Money to Your Heirs in Your Estate Plan? Think again

Photo by Hugo Aitken on Unsplash

When I moved out of my hometown to go to law school, my grandmother would send me packages of homemade tortillas and chocolate chip cookies. She sent these little tastes of home, not because there were no Mexican grandmothers making tortillas in my new town, but as a way to remind me of her love.

She was so proud of me for daring to reach for my dreams and tortillas and cookies were one of her ways to support me. She also tried matchmaking anytime I took her to a routine doctor’s visit or even to the hospital in an emergency, “Hi doctor, yes I’m having trouble breathing. Are you married? No? Well, this is my granddaughter, she’s going to be a lawyer.” But that’s another story.

When I meet with families about how to distribute their estate after they pass away, they often want to make similar “I love you” gifts. Gifts of tortillas haven’t come up, instead its usually cash gifts to friends or loved ones. Sometimes these are very small gifts but they represent big love. This usually comes up when we are designing a trust – the most popular way to pass property in California. Note: If you live in California and don’t have revocable living trust and you have children or own your own home, you probably need a trust.

One of the underlying themes with cash or care packages of tortillas and chocolate chip cookies, is that we equate these gifts with love. Take a scenario of a mother who leaves her son $1,000,000 and her daughter $1,000. Many people would ask why only $1,000 to the daughter? When parents do things like this is can be confusing and hurtful to their children. Even though they usually have some logical reason, it can feel like a slap in the face to the daughter. Consider also what will become of the relationship between the son and daughter? Did we make the holidays tense and uncomfortable? Have we torn an emotional gash that will estrange the children from each other for the rest of their lives? We must always consider the impact of our gifting.

In estate planning parlance gifts of money made in a Will or Trust are called “general gifts” and they are often problematic. So much so that California’s preeminent practice guide warns that these gifts “can distort the settlor’s dispositive plan, the trust drafter should counsel sparing use of them.”

What makes these gifts of cash so problematic?

  1. A general gift is paid first.
  • Consider a father with a net worth of $100,000.
  • He wants his daughter to inherit most of his wealth but also wants to make sure his best fishing pal is remembered with a gift of $10,000.
  • If father dies right after signing his trust, the fishing buddy would get a cash gift of $10,000 and his daughter would inherit everything else, $90,000. But it also almost never happens this way.
  • Most commonly, father goes on his merry way, happy that he’s taken care of his daughter and made a nice gift to his fishing buddy.
  • Years later, father has had some medical issues and spent a large amount of his savings on his medical care.  
  • When he passes away, father’s estate is only worth $11,000. The general gift is paid first so his fishing buddy gets a $10,000 and his daughter inherits the remainder, just $1,000. Was this father’s intent? What will the daughter think? Remember, when dealing with the death of a loved one, money equals love.

Consider that even if the trust value is at least $100k when dad dies, all the assets might not be held in cash. For example, dad could own a $100K a home intending that daughter inherit it when he dies. On his death, the trustee is require to make the general gift first so the house is sole to pay the $10,000 gift to the fishing buddy. Again, not the outcome dad would have wanted.

  • Your Trust is Mostly Private Unless It’s Not

One of the benefits of a trust is that it is a private document. Unlike a Will, it is not filed in a courthouse for the world to read. This is a real benefit because bad guys and fraudsters are staying up nights to separate your heirs from your money.

I am not a fan of hiding things unless there is a good reason to do so. Justice Brennan said “sunlight is the best disinfectant” and I often refer to that adage when trying to decide the best way to make a gift. Secrets among family members have a habit of causing trouble. However, there are times and good reasons for keeping things private.

Under California law, when you pass away certain people have a right to demand to see a copy of the trust. Those people include your heirs at law (people who would have inherited if you did not have a Will or Trust) and those people named in your trust. (It might also include other people in certain circumstances). 

If you leave dramatically different general gifts in your trust it can cause hurt feelings, driving people to fight and even litigate over what they thought they should have inherited. Do you want your niece to know how much you gave to her cousin? If not, better to make a gift in another way.

Your Gift May Not Be So Great After All

When I graduated from college with a degree in accounting my first job at prestigious tech company paid $15 per hour plus benefits. I happy with that. Now, over 20 years later, that is barely minimum wage in my town.

Consider that your very generous gift of $25K today might be spare change in 20 years and not have the impact you intended.  

So, is there a better alternative than a general gift in a trust?

I think so. Here are some alternatives to consider:

  • Give a percent of your estate.

In our first example, dad could have divided his estate in percentages: 10% to his buddy and 90% daughter. When dad passed away with %11,000, the buddy would have inherited $1,100  and daughter $8,900 – which was dad’s likely intent.

  • Use life insurance

A life insurance policy pays out a benefit to your beneficiaries when you die. There are some drawbacks to life insurance, for example if you forget to pay the premium or fail to update beneficiary designations.

  • Name your intended heir as pay on death beneficiary of a bank account, brokerage account, IRA, etc.

Using bank accounts like this are called “will substitutes” and they have their own set of risks and drawbacks. For example, my grandfather set up bank accounts naming my sister and I as pay on death beneficiaries. At some point, the accounts were either closed or emptied and when he died there was nothing for us. We were left to wonder did he intentionally disinherit us? Was he defrauded by a caregiver? Did he simply need the money during the end of his life? We will never know.

There are other issues with these will substitutes but there is a time and place for them.

  • Give the money now

A huge benefit of making a gift today is that you get the satisfaction of seeing someone really appreciate your gift because you are alive, after all. A drawback is that if you need the money for yourself later on, you won’t have it anymore. Also, some people feel that a gift made in a Will or Trust is more impactful than a lifetime gift. If you choose to do this, keep track of these gifts and keep your estate planning attorney and CPA informed.   

Everyone’s circumstances are different and if your attorney suggests making general gifts that’s likely the best arrangement for you in your current circumstances.

There are certainly other considerations that I have not mentioned here with transferring cash and property. What are some creative ideas you have for making gifts of cash after you pass away? 

Remember that everything you read on this website is for general information and entertainment purposes only. Do not take action or fail to act based on anything you read on this site. If anything you read on this website raises questions or concerns for you, take all that to your attorney so that you can get advice that is appropriate for you.