It’s a Gift! It’s a Loan! It’s an Advancement! by Anne Werker

VOLU M E 9, N U M B ER 4 , N OV E M B E R 20 0 5
It’s a Gift! It’s a Loan!
It’s an Advancement!
When an adult child receives a significant amount of
money from a parent during a parent’s lifetime, the child
may consider it a gift without conditions, regardless of the
parents’ intentions. The parents may intend this amount
either to be a gift; a loan that should be repaid; or an advance
on an inheritance to be taken into account in the division of
the parent’s estate, sometimes, and in this article, referred
to as an “advancement”.1 Therefore it is incumbent on the
solicitor taking instructions to canvas the intentions of the
testator if money is given to a child either before or after the
will is executed.
Without a specific provision in the will, if significant outlays
to one child have been made subsequent to the making of a
will that divides the estate equally among children, it may
be argued by the siblings that the amounts given to the one
child before death are to be brought into “hotchpot”.2 A
hotchpot calculation is a way of securing an equal division
among siblings by a notional increase of the estate by the
amounts advanced to one or another child before death, and
a corresponding decrease to their respective entitlement.
For example, if one child has received $100,000 towards a
purchase of a home but the other two children have not, then
when the testator dies with an estate worth $1.1 million, the
$100,000 is added back for the purpose of determining each
child’s share, and the same amount is deducted from the
share of child who received the advancement. As a result, the
child who received the advancement will receive $300,000
and the other two will receive $400,000 each.
Hotchpot calculations are rooted in the equitable presumption
against double portions, that is, in particular circumstances, a
parent does not intend that an inter vivos gift to a child shall
by Anne Werker
be duplicated with an equal entitlement to inherit from the
estate. Therefore a court, relying on the equitable doctrine of
ademption by advancement, will reduce a child’s inheritance
in proportion to the inter vivos gift. Whether amounts are
brought into hotchpot will depend on the expressed (or
implied) wishes of the testator.3 If there is little evidence of
what the testator/parent intended, then there will be problems
sorting out whether the advance was a gift, a loan, or is to be
reckoned as part of a child’s share. It will be more difficult,
but not impossible, to show that a proportional ademption
should occur if the advance is made before the making of a
will that divides the residue equally rather than if the advance
is made subsequent to the making of the will, particularly if
there is nothing in the will to suggest that previous advances
should be brought into hotchpot.4 Therefore, the solicitor
should ensure that intentions are reflected accurately in the
will and in the instrument documenting the advance.
Sometimes it will be difficult to prioritize the parent’s
intention. For example, $100,000 may be loaned to a
daughter by a parent to assist in the purchase of a house by
the daughter and her new husband. To ensure, in the event
of marriage breakdown, that repayment of the loan may be
demanded and the $100,000 would not fall into net family
property by being included in the value of the matrimonial
home, the lawyer acting for the parent may suggest that the
loan be evidenced by a note and secured by a mortgage. If the
parent dies, then the unpaid loan amount should be included
in the value of the parent’s estate. The child will be obliged
to repay the loan and the child’s share should be reduced by
the amount of the loan less any proportional entitlement to
repayment that the child has as a beneficiary of the estate.
continued on back
1.
Terminology can be confusing. The “presumption of advancement” is usually juxtaposed with the “presumption of resulting trust” and in that context, advancement
refers to a gift. An “advance” is often used in commercial contexts to refer to a loan, but in this article refers to any type of payment. An “advancement,” in this
article, refers to a payment of money that anticipates, and is in substitution for, an inheritance or part thereof.
2.
For a comprehensive and useful review of Hotchpot Clauses, see “Hotchpot Clauses – A Primer”, the paper given by Corina S. Weigl at the 2001 Fourth Annual
LSUC Estates and Trusts Forum.
3.
In an intestacy, resort must be had to section 25 of the Estate Administration Act: There must be a written expression of the intestate’s intention, or a written
acknowledgment by the child that the amount shall be brought into account, in order to equalize entitlements.
4.
See Thomas G. Feeney, The Canadian Law of Wills: Construction, pages 208 to 212, and Dawson v. Dawson (1867), L.R. 4 Eq. 504 at 511: “…the two
instruments must be looked to, and that the presumption always was… that where there was a second provision for the child, only one provision was intended for
that child in the way of a portion; but that presumption, like every other, is to be rebutted, not only by what is found in the instrument, but by external circumstances
and by parol evidence contemporary with the transaction in question.”
It’s a Gift! It’s a Loan! It’s an Advancement!
The separated spouse/daughter would have a harder case
to make that repayment was indeed anticipated (and it was
a true loan) if the parent’s will included a provision that
any loans to children should be forgiven and the children’s
benefits and entitlements should be equalized.5
If the will does contain a hotchpot clause, but does not
contain a provision to the effect that a loan to a child shall
not be claimed as a debt, then the child who got the advance
may still be liable to repay the estate. The absence of a
discharge in the will makes a difference if it turns out that
the estate is insufficient to provide the other children with
equal benefits. For example, if five children have an equal
share in an estate worth only $300,000 at death, and one of
the children had received an advance of $100,000, the other
four would receive only $75,000 if the advance is not repaid.
There would be no obligation on the fifth child to pay his
or her siblings $5,000 to make sure they all got an equal
amount. The situation would be different if it was clear that
the $100,000 was a loan. In that case the $100,000 would be
included in the value of the estate (and it would be subject to
estate administration tax accordingly), and the estate trustees
could claim repayment from the debtor child. If there is a
possibility that an amount lent to a child will exceed his or
her entitlement from the estate, then the hotchpot provision
used by the solicitor should be adjusted to discharge a debt
only if the child’s entitlement exceeds the loan amount.
On the other hand, if the child is a discharged bankrupt and
the parent was one of the proven creditors, then the debt
5.
(continued from front)
owing to the parent would have been released by virtue of the
discharge on bankruptcy. Or a demand for repayment of the
loan may not have been made within the limitation period
and collection of the debt may be statute barred. In each of
these situations, the entitlements of each child will still be
equalized if there is a provision in the will to the effect that
sums owing, whether legally constituting a debt or not, shall
be brought into account by way of hotchpot.
A common objection when accounts are passed is that the
original assets are incomplete and amounts loaned, for
example, to the estate trustee by the deceased have not been
repaid or listed as an asset. These are difficult cases that
will turn on the evidence, such as promissory notes or loan
agreements, informal notes in the deceased’s cheque register
and the absence of any proof of repayment. Corroboration
will be essential. The characterization of the transaction will
determine how it is reflected in the estate accounts. If the
amount was a gift then it will not be included in the original
assets. If the amount was a loan, then it should be included in
the original assets. If the amount was an advancement, then
it should not be included in the original assets but it should
be addressed in the scheme of distribution.
Amounts taken into hotchpot will not be subject to estate
administration tax if the will is probated. Although an
advancement, like a loan, is intended to be deducted from
an inheritance; an advancement, like a gift, is money already
“out the door” and should not be included in the value of the
estate as at death.
In the Ont. S.C.J. case of Goldring v. Lococo (2002) Toronto 02-CV-224687CM, the loan agreement between a father and his daughter included a provision
that the loan amount was a preliminary inheritance payment. The daughter predeceased her father and the father subsequently demanded repayment from his
son-in-law, the beneficiary of the daughter’s estate. The court found that the “transaction was a conditional gift, the principal condition being that it would be
repayable on demand should the marriage fail by virtue of divorce or separation. In the event [the daughter] having passed away in the course of a loving marriage,
and in light of the intention of the donor, the advance is to be characterized as a gift, the condition having been fulfilled”.
Breakfast Series
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estate-related issues.
The Hull & Hull Estate, Trust and Capacity Law Breakfast Series
provides members of the bar with presentations by one of Canada’s
leading Estate firms on topics of importance to estate practitioners.
The next Breakfast Series meeting, Wednesday, January 18, 2006, will be
a presentation of Preparing Estate Accounts - A “Hands-On” Overview Part II by Ian M. Hull, Jordan M. Atin and Anne M. Werker.
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