Early inheritance for one - how to equalize disbursement?

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g2morrow
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Early inheritance for one - how to equalize disbursement?

Post by g2morrow »

Hopefully, I'll be able to ask this correctly. My mother has asked me to help equalize the distribution of her assets when she passes. Normally this would be straight forward, Three kids, each get 1/3rd. But she has given one child a significant early distribution. Now an easy answer would be to give the other three the same amount now but with gift taxes etc .... She doesn't want to do that (and I agree). So how would this get calculated out depending on her longevity? Clearly money from 10 years ago is worth more then money from 10 years from now. I'm kinda at a loss here. How do you compensate for the time/value of money?
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prudent
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Re: Early inheritance for one - how to equalize disbursement?

Post by prudent »

Are you sure gift taxes would come into play if it was done now? They don't apply until a little over $11 million gifted lifetime, although a gift tax return (with no actual tax imposed) is required if gifting over $15,000 per person in a year.
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g2morrow
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Re: Early inheritance for one - how to equalize disbursement?

Post by g2morrow »

prudent wrote: Thu Feb 13, 2020 1:30 pm Are you sure gift taxes would come into play if it was done now? They don't apply until a little over $11 million gifted lifetime, although a gift tax return (with no actual tax imposed) is required if gifting over $15,000 per person in a year.
Its not just the gift tax - it would take a bigger bite out of her nest egg then she's comfortable with.
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Re: Early inheritance for one - how to equalize disbursement?

Post by Random Poster »

g2morrow wrote: Thu Feb 13, 2020 1:20 pm Hopefully, I'll be able to ask this correctly. My mother has asked me to help equalize the distribution of her assets when she passes. Normally this would be straight forward, Three kids, each get 1/3rd. But she has given one child a significant early distribution. Now an easy answer would be to give the other three the same amount now but with gift taxes etc .... She doesn't want to do that (and I agree). So how would this get calculated out depending on her longevity? Clearly money from 10 years ago is worth more then money from 10 years from now. I'm kinda at a loss here. How do you compensate for the time/value of money?
Take the amount of the gift given in 2010 (or whenever).

Calculate what that amount would be worth in today’s dollars (or whenever) using CPI or whatever inflation rate you want to use. Let’s say that is now 100k.

Take the amount of money to be distributed today (or whenever) and divide it by three. Let’s say that is 400k.

Give 1/3 to one person and 1/3 to another person, neither of whom got the gift in 2010 (or whenever). So each gets 133k.

Take the remaining 1/3 and subtract out the inflated value of the gift that they received 10 years ago (or whenever). Give them the remainder. So that would be 33k.

Then divide the inflated amount that was subtracted out evenly and distribute.

So 2 people would get 166k each, and the one who got an advance gift would get 66k.
tigers174
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Re: Early inheritance for one - how to equalize disbursement?

Post by tigers174 »

I'd look at what percent of the total portfolio was given to the one person. Take that out of 33.3% and the remainder is what they get as inheritance.
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Re: Early inheritance for one - how to equalize disbursement?

Post by as9 »

Random Poster wrote: Thu Feb 13, 2020 1:43 pm
g2morrow wrote: Thu Feb 13, 2020 1:20 pm Hopefully, I'll be able to ask this correctly. My mother has asked me to help equalize the distribution of her assets when she passes. Normally this would be straight forward, Three kids, each get 1/3rd. But she has given one child a significant early distribution. Now an easy answer would be to give the other three the same amount now but with gift taxes etc .... She doesn't want to do that (and I agree). So how would this get calculated out depending on her longevity? Clearly money from 10 years ago is worth more then money from 10 years from now. I'm kinda at a loss here. How do you compensate for the time/value of money?
Take the amount of the gift given in 2010 (or whenever).

Calculate what that amount would be worth in today’s dollars (or whenever) using CPI or whatever inflation rate you want to use. Let’s say that is now 100k.

Take the amount of money to be distributed today (or whenever) and divide it by three. Let’s say that is 400k.

Give 1/3 to one person and 1/3 to another person, neither of whom got the gift in 2010 (or whenever). So each gets 133k.

Take the remaining 1/3 and subtract out the inflated value of the gift that they received 10 years ago (or whenever). Give them the remainder. So that would be 33k.

Then divide the inflated amount that was subtracted out evenly and distribute.

So 2 people would get 166k each, and the one who got an advance gift would get 66k.
^^ Sounds right. Make sure it's agreed that those first 2/3s (to the two that didn't get anything yet) get paid first. If there's nothing left after that then the other sibling already got their inheritance.
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Re: Early inheritance for one - how to equalize disbursement?

Post by psteinx »

There's no real way to be precise about this. Given that the others are apparently not in serious financial need, then if the others got THEIR investments early, there's a good chance they'd invest the proceeds, likely in a somewhat more aggressive way (more equities) than your mother has her portfolio now.

But that doesn't mean it's a great idea to project that forward, especially since it's unlikely your mother actually has her money deployed that way.

I think the two relatively obvious, lower conflict ways to do this are to deduct the early heir's early receipts directly from his/her ultimate share/inheritance, or, with a simple inflation adjustment. I'd probably go with an inflation adjusted amount. But I'm not sure how that might be reflected in estate documents (I am not a lawyer) - would a formula referencing the CPI or maybe a straight % adjustment per year be ok?

Also, this is premised on the 3 children having at least somewhat similar life approaches, but the early heir just being perhaps a bit of a spendthrift or whatever. If there was truly a life hardship (expensive illness, say) for the early heir, then perhaps the division should not be adjusted for the early inheritance, or conceivably tilted in favor of the one with higher likely need.
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Re: Early inheritance for one - how to equalize disbursement?

Post by 123 »

As long as you keep in mind the percentage of the estate distributed to each beneficiary it is (relatively) easy. But you do need some historical numbers to do it accurately.

Example: Beneficiary "A" got an "advance inheritance" of $100,000 five years ago when the total value of the estate was $1 million (value of assets in various accounts and real estate/home equity). Beneficiary "A" has thus already received 10% of the estate.

Death subsequently occurs and the value of the estate at the time is $1.75 million. Beneficiary "A" is to get 33% of estate but has already received 10%. Accordingly beneficiary "A" gets 23% of $1.75 million ($1,750,000 * 0.23) = $402,500.

The other two beneficiaries divide the remaining balance of the estate since all 3 were to share the estate equally. Therefore $1,750,000 - $402,500 gives $1,247,500 to divide between the remaining two beneficiaries. Each would get $673,500.

With this method you divide up the estate "pie" equally over time. Yes it is possible that the value of the estate could go down over time (due to medical or nursing home expenses for example) but this method accommodates that.
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Re: Early inheritance for one - how to equalize disbursement?

Post by MikeG62 »

Doesn’t seem that hard to me. Why not have your Mom amended her will to provide that following her death, the two children who did not get an early inheritance distribution would each receive an amount equal to the amount of the early inheritance distribution given to the first child (or index it for inflation if you are so inclined) before any remaining assets are split?

For example, assume the 1st child got an early inheritance distribution of $250,000 on January 1, 2015. Assume your Mom passes ten years later and further assume her estate is worth $1.5 million at that time. As part of settling her estate, both you (child 2) are your other sibling who did not receive the early distribution (child 3) would each get $250,000 (or index it for inflation if that is what is agreed - let’s assume that is $300,000). The end result would be that in dividing up her estate, children 2 and 3 would each get $250,000 (or $300,000 if you wish to index it for inflation). The remaining balance of the estate (either $1.0 million or $900,000) would then be divided three ways.

The will could be worded in such a way that the inflation adjustment will be 2.0% per year compounded. This way she avoids putting a specific number in there as she won’t know the amount until she passes. Or use the published inflation index per year provided by the Federal government.

Personally, I would skip the inflation adjustment. It just feels ticky-tacky to me. Presumably child 1 got the early distribution because he/she was in a tough financial situation. Children 2 and 3 should consider themselves fortunate that they were not in a similar situation necessitating an early inheritance distribution.
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Re: Early inheritance for one - how to equalize disbursement?

Post by Jack FFR1846 »

Have the child who has received significant money already start making payments to the 2 who have not. How much? I don't know.

And on the estate tax thing, some states, like mine have a cliff just at $1M. So while the $11M thing is great for federal, in state, one could be socked with as much as 16%.
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Re: Early inheritance for one - how to equalize disbursement?

Post by 123 »

There can be complications in the calculations if there are state estate taxes (paid by the estate) or state inheritance taxes (paid by beneficiary) involved. Of course the estate and (each) beneficiary could reside in a different states.
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Re: Early inheritance for one - how to equalize disbursement?

Post by dbr »

There are a variety of solutions such as already mentioned above, but there is no scheme that makes things exactly the same, also for reasons mentioned in comments above. Siblings that want to find something to argue with in any scheme will be able to do that, and siblings who aren't interesting in making those kinds of comparisons won't.

I would give the other two what the first one got and divide the remainder.
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Re: Early inheritance for one - how to equalize disbursement?

Post by GlennK »

After all the estate settlement is paid for, and you have the total amount to be dispersed, it is simply the math equation: x + x + (x-EARLY) = Total. So 3x = Total + EARLY. Then you and the one sibling would get x, and the sibling who received the early inheritance would get x-EARLY.

Where Early is either the amount given to your sibling early or the amount adjusted for inflation.

Using the example from above where the estate was $400,000 and the EARLY = !00,000. Then 3x = 500,000 = $166,666 as the earlier post also stated. I just find the mathematical equation easier to work with and easier to explain.

My only warning is if you are going to adjust for inflation, please make sure all parties know this ahead of time. Personally, I wouldn't worry about adjusting it just to keep the peace.
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Re: Early inheritance for one - how to equalize disbursement?

Post by Stinky »

tigers174 wrote: Thu Feb 13, 2020 1:48 pm I'd look at what percent of the total portfolio was given to the one person. Take that out of 33.3% and the remainder is what they get as inheritance.
I like this approach.

Really simple to apply, and should be “fair” to all.
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Re: Early inheritance for one - how to equalize disbursement?

Post by cadreamer2015 »

Whatever method you (or really your mother) use, make sure your mother documents this in her will or trust instrument. That way, if you are the executor, personal representative, or trustee you will be following her written instructions. Otherwise I would predict there would be discord and distrust between the heirs. Even with written instructions there can be hard feelings (I know this from DW’s experience) but at least there would be clear legal authority for making this post-Morten adjustment in the inheritance.
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Re: Early inheritance for one - how to equalize disbursement?

Post by MotoTrojan »

Stinky wrote: Thu Feb 13, 2020 2:29 pm
tigers174 wrote: Thu Feb 13, 2020 1:48 pm I'd look at what percent of the total portfolio was given to the one person. Take that out of 33.3% and the remainder is what they get as inheritance.
I like this approach.

Really simple to apply, and should be “fair” to all.
I disagree that it’s fair, but it sure is easy.
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Re: Early inheritance for one - how to equalize disbursement?

Post by JGoneRiding »

I am guessing you need to put this in a will yo be divided?

This means that unless it's enough to justify a complicated trust you need to put the wording in in such away that it will be easily determined by a judge.


That means complicated adjusted math is out
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Simply state that the 3rd child share is to be reduced by the amount of money previously received and possible that there is an outside accounting of this that is regularly updated and certified by mom.

Its is possible that mom dies with little money in which case 1 and 2 just didn't get as much so be it.
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Re: Early inheritance for one - how to equalize disbursement?

Post by Yuba »

Another option if possible (without a tax impact) is to separate out an account with 2x of the amount the one person got.
Have the beneficiaries on that account be the 2 people who didn't get the early disbursement only.

That way, the regular account would have 3 beneficiaries, and the special account would only have 2. Have the special account be the last account where money is withdrawn from since it was already given to the first person, and should be used last for expenses.

My $0.02 worth.

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Re: Early inheritance for one - how to equalize disbursement?

Post by goingup »

dbr wrote: Thu Feb 13, 2020 2:21 pmI would give the other two what the first one got and divide the remainder.
Exactly.

Reading some of the other responses that suggest adjusting the amount for inflation makes me wonder if other posters have A) Ever received an inheritance and B) Like their siblings and plan to having ongoing good relationships.

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Re: Early inheritance for one - how to equalize disbursement?

Post by 837373684 »

psteinx wrote: Thu Feb 13, 2020 1:57 pm If there was truly a life hardship (expensive illness, say) for the early heir, then perhaps the division should not be adjusted for the early inheritance, or conceivably tilted in favor of the one with higher likely need.
+1
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Re: Early inheritance for one - how to equalize disbursement?

Post by FIREchief »

g2morrow wrote: Thu Feb 13, 2020 1:20 pm My mother has asked me to help equalize the distribution of her assets when she passes.
I don't understand this. She "asked" you? Are you the person nominated to serve as executor of her estate? If so, you will be compelled to do whatever her will states. Does the will address this or is she just thinking that as executor you can make adjustments based upon verbal instructions? That's dangerous ground if the early recipient chooses to challenge your actions as executor.
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Re: Early inheritance for one - how to equalize disbursement?

Post by NancyABQ »

dbr wrote: Thu Feb 13, 2020 2:21 pmI would give the other two what the first one got and divide the remainder.
This is how my parents handled it for a similar situation. Simple enough. The children were aware of what was being done and how it was intended to be handled (what was in the will) so if they had an objection, I guess they could have raised it. They didn't. The amount involved was $100K.
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Re: Early inheritance for one - how to equalize disbursement?

Post by dm200 »

1. What is the nature of the relationship between the one who received the money now and the other two? Good, bad, hostile,?

2. Approximately how much (a percentage, perhaps) was distributed to the person?

3. I would also not suggest/recommend giving the other two anything now - she might need the money for her own support, etc.

4. I don't know how this could be done (perhaps check with an estate planning attorney), but it might be to have some kind of dollar or percentage difference less given to that party.

5. In my opinion, there is no exact or precise way of doing this - that is both practical and achievable from a relationship point of view.

6. Here is one idea: Have her place/deposit the dollar amount distributed early in each of two accounts (perhaps CDs) and designate each of the two that did not receive the distribution as POD beneficiaries. Then, for the rest of her assets, just spit them three ways equally. Fully inform all three about this method/plan.
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Re: Early inheritance for one - how to equalize disbursement?

Post by Doom&Gloom »

NancyABQ wrote: Thu Feb 13, 2020 4:26 pm
dbr wrote: Thu Feb 13, 2020 2:21 pmI would give the other two what the first one got and divide the remainder.
This is how my parents handled it for a similar situation. Simple enough. The children were aware of what was being done and how it was intended to be handled (what was in the will) so if they had an objection, I guess they could have raised it. They didn't. The amount involved was $100K.
This is what my MIL did. The two latecomers came up short (obvious to us--less so to them), but it was fair in MIL's mind. And, honestly, it was probably the best way to keep already frail relationships from becoming acrimonious.
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Re: Early inheritance for one - how to equalize disbursement?

Post by BL »

Did she have a written agreement?
Or at least an understanding with the recipient?
What does the lawyer say?
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Re: Early inheritance for one - how to equalize disbursement?

Post by fourwheelcycle »

Here is a link to a very simple US Bureau of Labor Statistics CPI Inflation Calculator - https://data.bls.gov/cgi-bin/cpicalc.pl

Simply inflate the "early" sibling's gift to the month and year your mother actually dies and distribute portions of your mother's estate equal to the inflated value of the "early" sibling's gift to each of the other siblings. Then divide anything left in three equal portions. If there is not enough money in the estate to complete step one, divide the estate in two equal portions and distribute one portion to each of the other siblings - that is the best and fairest thing you can do.

We gave one of our children the downpayment for their first home many years ago and told our other child we would give them the same amount when they bought their first home. Three years passed and it became clear child two would not be buying their first home for at least several more years, so we gave child two a gift equal to the first child's gift, with no inflation adjustment. I imagine a much longer time period will have passed between your mother's "early" gift and your distribution of her estate, so an inflation adjustment would be appropriate.
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Re: Early inheritance for one - how to equalize disbursement?

Post by remomnyc »

NancyABQ wrote: Thu Feb 13, 2020 4:26 pm
dbr wrote: Thu Feb 13, 2020 2:21 pmI would give the other two what the first one got and divide the remainder.
This is how my parents handled it for a similar situation. Simple enough. The children were aware of what was being done and how it was intended to be handled (what was in the will) so if they had an objection, I guess they could have raised it. They didn't. The amount involved was $100K.
Another vote for this method. Many of my friends parents have done this and none of the children have objected.
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Re: Early inheritance for one - how to equalize disbursement?

Post by MP123 »

remomnyc wrote: Thu Feb 13, 2020 9:45 pm
NancyABQ wrote: Thu Feb 13, 2020 4:26 pm
dbr wrote: Thu Feb 13, 2020 2:21 pmI would give the other two what the first one got and divide the remainder.
This is how my parents handled it for a similar situation. Simple enough. The children were aware of what was being done and how it was intended to be handled (what was in the will) so if they had an objection, I guess they could have raised it. They didn't. The amount involved was $100K.
Another vote for this method. Many of my friends parents have done this and none of the children have objected.
The simplicity is nice and it might not be an issue in some families and at some dollar amounts.

But our OP did ask to account for the time value of money.

Certainly if the first gift (bequest) took place 30 years ago then the other two siblings aren't getting their fair share of that in today's money if they take the above approach.
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Re: Early inheritance for one - how to equalize disbursement?

Post by dbr »

MP123 wrote: Thu Feb 13, 2020 9:59 pm
But our OP did ask to account for the time value of money.
You are right, that was asked. There is also no indisputable answer to that because it is scenario dependent. In this case the time value of money is infinite because the money was for a life-saving medical procedure. Or it was zero because the money was immediately spent to cover gambling debts. The other two siblings, if they had the money, would have invested it all in Apple, so the grandmother has no way to make up for that. Or the sibling who got the money invested it in Apple and is a millionaire and the grandmother's money stayed in T-bills.

These things can always be resolved if everyone agrees, but what to agree to is arbitrary. I would argue that there was a reason the one sibling got the money early and whatever it was exactly justifies the extra time value and we can go back to ignoring it.
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Re: Early inheritance for one - how to equalize disbursement?

Post by dm200 »

I would also consider the tradeoff between being 100% fully fair, equal, etc. and peaceful family relationships.

is it worth a few dollars more to end up in a family dispute?
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g2morrow
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Re: Early inheritance for one - how to equalize disbursement?

Post by g2morrow »

Wow, lots of good info here - let me try and clear up a few things to hopefully answer some questions.

The money wasn't exactly given. It was an agreement equity share in a property. Essentially my parents put some money down so she could get a house with the agreement being, once the house was sold my parents would get the original 'investment' back plus 50% of the gain in property value. They had the exact same 'deal' with my brother who, after selling, fulfilled the agreement. My sister though took it upon herself to decide that it was an early inheritance for herself. My mother, father having past, didn't like it but decided it was better than ruining the relationship. She doesn't really need the money but she didn't' like how it was handled.

So currently, in my mothers' trust, she has it so that everything is divided equally and then the original investment (~60k) is taken from my sister and distributed to the other two. the trust was created before my sister sold her house. It seems fair enough and I see it was suggested multiple times here. Everything is good.

At least that's what I thought until she asked me to do some research to find out what the amount was that she should have received. Easy enough, public records property sold, etc.... Turns out if everything had gone as agreed upon, she should have given my parents 110k. I took 9% off the selling price to estimate the real estate transaction cost (yes, I estimated high) Now my mother really doesn't think its fair and asked for my guidance. She still does not want to ruin the relationship with her daughter over 'demanding' the money now but realizes its unfair to the other children and wants that addressed.

I'm going to suggest to her one of two ways:
1. the % of the total assets method. Whereas the 'early inheritance' was calculated to be 10% of total assets (made 10% up, have not done the calculations yet) So, sister would get ~23% (1/3-10%) and the two brothers would get ~38.5% (1/3 + 5%) - this would account for any growth - my mother is in good health and her nest egg could easily double before passing. So now we're talking about some serious money. So how does that get worded in a Trust? or should I not worry about it and leave it up to the lawyer?
2. Just change the number from 60k to 110k in current trust

I told my mother that it's her money and she can do as she wishes. She does not have to justify one way or another (in her trust) why the decision was made or what numbers were assumed to make the calculations, etc...

Yes, I am the executor of her trust. Which puts me in a tough spot. I'm giving advice that would directly benefit me. Should the trust have a 'poison pill' in it about litigation? What other pitfalls should I look out for?

TIA

ps - I was offered the same deal when younger and was lucky enough not to do it. I just didn't think doing business with family was such a good idea.
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Re: Early inheritance for one - how to equalize disbursement?

Post by g2morrow »

123 wrote: Thu Feb 13, 2020 1:57 pm As long as you keep in mind the percentage of the estate distributed to each beneficiary it is (relatively) easy. But you do need some historical numbers to do it accurately.

Example: Beneficiary "A" got an "advance inheritance" of $100,000 five years ago when the total value of the estate was $1 million (value of assets in various accounts and real estate/home equity). Beneficiary "A" has thus already received 10% of the estate.

Death subsequently occurs and the value of the estate at the time is $1.75 million. Beneficiary "A" is to get 33% of estate but has already received 10%. Accordingly beneficiary "A" gets 23% of $1.75 million ($1,750,000 * 0.23) = $402,500.

The other two beneficiaries divide the remaining balance of the estate since all 3 were to share the estate equally. Therefore $1,750,000 - $402,500 gives $1,247,500 to divide between the remaining two beneficiaries. Each would get $673,500.

With this method you divide up the estate "pie" equally over time. Yes it is possible that the value of the estate could go down over time (due to medical or nursing home expenses for example) but this method accommodates that.
Thanks for the explanation - this is going to be one of the suggestions
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Re: Early inheritance for one - how to equalize disbursement?

Post by Jags4186 »

g2morrow wrote: Fri Feb 14, 2020 10:50 am Wow, lots of good info here - let me try and clear up a few things to hopefully answer some questions.

The money wasn't exactly given. It was an agreement equity share in a property. Essentially my parents put some money down so she could get a house with the agreement being, once the house was sold my parents would get the original 'investment' back plus 50% of the gain in property value. They had the exact same 'deal' with my brother who, after selling, fulfilled the agreement. My sister though took it upon herself to decide that it was an early inheritance for herself. My mother, father having past, didn't like it but decided it was better than ruining the relationship. She doesn't really need the money but she didn't' like how it was handled.

So currently, in my mothers' trust, she has it so that everything is divided equally and then the original investment (~60k) is taken from my sister and distributed to the other two. the trust was created before my sister sold her house. It seems fair enough and I see it was suggested multiple times here. Everything is good.

At least that's what I thought until she asked me to do some research to find out what the amount was that she should have received. Easy enough, public records property sold, etc.... Turns out if everything had gone as agreed upon, she should have given my parents 110k. I took 9% off the selling price to estimate the real estate transaction cost (yes, I estimated high) Now my mother really doesn't think its fair and asked for my guidance. She still does not want to ruin the relationship with her daughter over 'demanding' the money now but realizes its unfair to the other children and wants that addressed.

I'm going to suggest to her one of two ways:
1. the % of the total assets method. Whereas the 'early inheritance' was calculated to be 10% of total assets (made 10% up, have not done the calculations yet) So, sister would get ~23% (1/3-10%) and the two brothers would get ~38.5% (1/3 + 5%) - this would account for any growth - my mother is in good health and her nest egg could easily double before passing. So now we're talking about some serious money. So how does that get worded in a Trust? or should I not worry about it and leave it up to the lawyer?
2. Just change the number from 60k to 110k in current trust

I told my mother that it's her money and she can do as she wishes. She does not have to justify one way or another (in her trust) why the decision was made or what numbers were assumed to make the calculations, etc...

Yes, I am the executor of her trust. Which puts me in a tough spot. I'm giving advice that would directly benefit me. Should the trust have a 'poison pill' in it about litigation? What other pitfalls should I look out for?

TIA

ps - I was offered the same deal when younger and was lucky enough not to do it. I just didn't think doing business with family was such a good idea.
For better or worse, your mother went along with the early inheritance thing and therefore the hypothetical gain from sale of the house is gone.

The options are:

1) disburse $60k to the two other siblings first, then split the remaining assets by 3 (you and sibling 1 annoyed, sibling 2 happy)
2) have your mother explain to your sibling who “changed the deal” that there’s going to be $60k + $25k distributed to each sibling first then the rest is being split 3 ways. (You and sibling 1 happy, sibling 2 annoyed)

There will be hurt feelings either way. I would go with #2 as I’d rather be made whole and have my sibling be bent out of shape than not be made whole and personally be bent out of shape.

Definitely have the $60k disbursed 1st before remaining assets split. If something crazy happens and the estate only ends up with $300k at time of death you and sibling 1 will not get the full $60k if you have the assets split by 3 and then $120k deducted from the first sibling’s share.
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Re: Early inheritance for one - how to equalize disbursement?

Post by littlebird »

MikeG62 wrote: Thu Feb 13, 2020 1:57 pm Doesn’t seem that hard to me. Why not have your Mom amended her will to provide that following her death, the two children who did not get an early inheritance distribution would each receive an amount equal to the amount of the early inheritance distribution given to the first child (or index it for inflation if you are so inclined) before any remaining assets are split?

For example, assume the 1st child got an early inheritance distribution of $250,000 on January 1, 2015. Assume your Mom passes ten years later and further assume her estate is worth $1.5 million at that time. As part of settling her estate, both you (child 2) are your other sibling who did not receive the early distribution (child 3) would each get $250,000 (or index it for inflation if that is what is agreed - let’s assume that is $300,000). The end result would be that in dividing up her estate, children 2 and 3 would each get $250,000 (or $300,000 if you wish to index it for inflation). The remaining balance of the estate (either $1.0 million or $900,000) would then be divided three ways.
I have drawn up a will this way for a similar situation.
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g2morrow
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Re: Early inheritance for one - how to equalize disbursement?

Post by g2morrow »

Jags4186 wrote: Fri Feb 14, 2020 11:00 am For better or worse, your mother went along with the early inheritance thing and therefore the hypothetical gain from sale of the house is gone.

The options are:

1) disburse $60k to the two other siblings first, then split the remaining assets by 3 (you and sibling 1 annoyed, sibling 2 happy)
2) have your mother explain to your sibling who “changed the deal” that there’s going to be $60k + $25k distributed to each sibling first then the rest is being split 3 ways. (You and sibling 1 happy, sibling 2 annoyed)

There will be hurt feelings either way. I would go with #2 as I’d rather be made whole and have my sibling be bent out of shape than not be made whole and personally be bent out of shape.

Definitely have the $60k disbursed 1st before remaining assets split. If something crazy happens and the estate only ends up with $300k at time of death you and sibling 1 will not get the full $60k if you have the assets split by 3 and then $120k deducted from the first sibling’s share.
This is a good suggestion, I'm all for keeping the peace. The early inheritor knows that its being 'settled' in the trust, which is one of the reasons she gave and didn't fulfill her obligation. That and she didn't have the cash. She just doesn't know 'how' its being settled in the trust. If my mother goes with the adjusted for time option, my sister will probably be upset. That 110 could grow significantly over time.
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Re: Early inheritance for one - how to equalize disbursement?

Post by jeffyscott »

I am the financial fairness police with our kids, because my mom was the opposite and that created issues among her children. As it happens, we are currently doing exactly this -- one child is getting a partial early inheritance, while 2 others are not (their choice). My method may be more complex than what you and your mother want to do, but here is the short version:

Whatever amount we give Child A as an early inheritance, we will give effective control of the same amount to Child B and and Child C and they may each decide what they want “their money” to be invested in. The money would remain in our accounts, but their share of it would be in a fund or funds of their choosing (or left with the default option, where they just have a proportional share of all of our investments).

The default option is to leave funds invested as they currently are. I determine our overall returns quarterly, so I just apply that return to the deferred gift balance each quarter for B & C. (They both have just left things this way). Balance in B & C "accounts" is tracked on a spreadsheet that all have access to.

So, for example, if we give Child A $50,000, Child B and C would each be assigned $50,000 of our money. Then if that $50,000 grows to, say, $80K before we actually give it to them, they would get $80K each at that time.

I then adjust percentages to each beneficiary on one Roth account to account for this, since child A got after tax money. In addition, if child B & C were given an equal amount now, the money would come out of a tax-deferred account and we would corresponding reduce Roth conversions. So the money they do not take is effectively added to Roth. If child A were given $50,000 and the balance of the indicated Roth were $200K, the child A gets 16.66% ($33,320), while the other two get 41.67% ($83,340). I can change these percentages each quarter.

An easier way to do about the same thing would be to, in this example, put $100,000 in a separate Roth account at the same time $50,000 was given to Child A. Then make the beneficiaries of that Roth account the other two children.

I have no idea about trusts, all our our money will pass via account beneficiaries. The only thing of significance that would be distributed via will is the proceeds from selling our house.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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g2morrow
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Re: Early inheritance for one - how to equalize disbursement?

Post by g2morrow »

MotoTrojan wrote: Thu Feb 13, 2020 2:45 pm I disagree that it’s fair, but it sure is easy.
can you explain what you don't think is fair about this approach?
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dm200
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Re: Early inheritance for one - how to equalize disbursement?

Post by dm200 »

It may also be the case that, for many reasons, an equal dollar amount distribution may not what you want to do. Perhaps one adult child has a situation where more is justified or another is not in such a situation.

In our case, things are simple - just one child!!
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g2morrow
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Re: Early inheritance for one - how to equalize disbursement?

Post by g2morrow »

jeffyscott wrote: Fri Feb 14, 2020 11:33 am I am the financial fairness police with our kids, because my mom was the opposite and that created issues among her children. As it happens, we are currently doing exactly this -- one child is getting a partial early inheritance, while 2 others are not (their choice). My method may be more complex than what you and your mother want to do, but here is the short version:

Whatever amount we give Child A as an early inheritance, we will give effective control of the same amount to Child B and and Child C and they may each decide what they want “their money” to be invested in. The money would remain in our accounts, but their share of it would be in a fund or funds of their choosing (or left with the default option, where they just have a proportional share of all of our investments).

The default option is to leave funds invested as they currently are. I determine our overall returns quarterly, so I just apply that return to the deferred gift balance each quarter for B & C. (They both have just left things this way). Balance in B & C "accounts" is tracked on a spreadsheet that all have access to.

So, for example, if we give Child A $50,000, Child B and C would each be assigned $50,000 of our money. Then if that $50,000 grows to, say, $80K before we actually give it to them, they would get $80K each at that time.

I then adjust percentages to each beneficiary on one Roth account to account for this, since child A got after tax money. In addition, if child B & C were given an equal amount now, the money would come out of a tax-deferred account and we would corresponding reduce Roth conversions. So the money they do not take is effectively added to Roth. If child A were given $50,000 and the balance of the indicated Roth were $200K, the child A gets 16.66% ($33,320), while the other two get 41.67% ($83,340). I can change these percentages each quarter.

An easier way to do about the same thing would be to, in this example, put $100,000 in a separate Roth account at the same time $50,000 was given to Child A. Then make the beneficiaries of that Roth account the other two children.

I have no idea about trusts, all our our money will pass via account beneficiaries. The only thing of significance that would be distributed via will is the proceeds from selling our house.
wiw - that sounds super complicated - did you calculate out what the difference would be if you just figured out the % at time of early inheritance?
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Re: Early inheritance for one - how to equalize disbursement?

Post by MotoTrojan »

g2morrow wrote: Fri Feb 14, 2020 11:35 am
MotoTrojan wrote: Thu Feb 13, 2020 2:45 pm I disagree that it’s fair, but it sure is easy.
can you explain what you don't think is fair about this approach?
There is a big difference between getting $100K today and $100K in 30 years (just random numbers). At a minimum I would index it for inflation, but that is still an unfair comparison. A financially well off individual that receives $100K today could easily turn that in to an inflation adjusted $500K or more over 30 years.
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Re: Early inheritance for one - how to equalize disbursement?

Post by tigers174 »

MotoTrojan wrote: Fri Feb 14, 2020 12:05 pm
g2morrow wrote: Fri Feb 14, 2020 11:35 am
MotoTrojan wrote: Thu Feb 13, 2020 2:45 pm I disagree that it’s fair, but it sure is easy.
can you explain what you don't think is fair about this approach?
There is a big difference between getting $100K today and $100K in 30 years (just random numbers). At a minimum I would index it for inflation, but that is still an unfair comparison. A financially well off individual that receives $100K today could easily turn that in to an inflation adjusted $500K or more over 30 years.
My idea was more, person A received 10% of the portfolio value today, so now they only get 23.3% of the portfolio as inheritance. So it should be indexed to the growth of the inheritance somewhat. Of course, the inheritance portfolio can decrease too.
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Re: Early inheritance for one - how to equalize disbursement?

Post by g2morrow »

MotoTrojan wrote: Fri Feb 14, 2020 12:05 pm There is a big difference between getting $100K today and $100K in 30 years (just random numbers). At a minimum I would index it for inflation, but that is still an unfair comparison. A financially well off individual that receives $100K today could easily turn that in to an inflation adjusted $500K or more over 30 years.
Ok, I misunderstood - I totally agree with what you say here.
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Re: Early inheritance for one - how to equalize disbursement?

Post by smackboy1 »

123 wrote: Thu Feb 13, 2020 1:57 pmExample: Beneficiary "A" got an "advance inheritance" of $100,000 five years ago when the total value of the estate was $1 million (value of assets in various accounts and real estate/home equity). Beneficiary "A" has thus already received 10% of the estate.

Death subsequently occurs and the value of the estate at the time is $1.75 million. Beneficiary "A" is to get 33% of estate but has already received 10%. Accordingly beneficiary "A" gets 23% of $1.75 million ($1,750,000 * 0.23) = $402,500.

The other two beneficiaries divide the remaining balance of the estate since all 3 were to share the estate equally. Therefore $1,750,000 - $402,500 gives $1,247,500 to divide between the remaining two beneficiaries. Each would get $673,500.

With this method you divide up the estate "pie" equally over time. Yes it is possible that the value of the estate could go down over time (due to medical or nursing home expenses for example) but this method accommodates that.
Does this method fairly account for mom's living expenses? Unless I am missing something, the problem with using a pure % method is that the pie from 5 years ago was bigger than the pie today because mom has eaten some of it. Another problem is if there is a market recession during the 5 years. If the market goes up, then A still gets a 23% share of the appreciation. But if the market goes down, A's 10% from 5 years ago has effectively locked in those gains.

Using the above example, instead of $1.75 MM at death, let's change it so mom had large nursing home expenses over the years and maybe the market is in recession. Assume the estate is valued at $600K.

A gets 23% x $600K = $138K for a grand total of $100K + $138K = $238K

B and C each get ($600K - $138K)/2 = $231K

And that doesn't even take into account that using CPI $100,000 from 2015 is equivalent to $110,380 in 2020.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.
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Re: Early inheritance for one - how to equalize disbursement?

Post by bryanm »

123 wrote: Thu Feb 13, 2020 1:57 pm As long as you keep in mind the percentage of the estate distributed to each beneficiary it is (relatively) easy. But you do need some historical numbers to do it accurately.

Example: Beneficiary "A" got an "advance inheritance" of $100,000 five years ago when the total value of the estate was $1 million (value of assets in various accounts and real estate/home equity). Beneficiary "A" has thus already received 10% of the estate.

Death subsequently occurs and the value of the estate at the time is $1.75 million. Beneficiary "A" is to get 33% of estate but has already received 10%. Accordingly beneficiary "A" gets 23% of $1.75 million ($1,750,000 * 0.23) = $402,500.

The other two beneficiaries divide the remaining balance of the estate since all 3 were to share the estate equally. Therefore $1,750,000 - $402,500 gives $1,247,500 to divide between the remaining two beneficiaries. Each would get $673,500.

With this method you divide up the estate "pie" equally over time. Yes it is possible that the value of the estate could go down over time (due to medical or nursing home expenses for example) but this method accommodates that.
I'm not sure how much it matters, but I think the math here is slightly off to the detriment of A. You shouldn't just reduce the percentage payout by 10%, because the 1.75MM is already only 90% of the estate. If you do the math with zero growth it's more intuitive. Giving A 23% of $900,000 gives her $207,000, plus the $100,000 disbursement means $307,000, still shy of a true third.

I believe the correct math would be to divide the final estate by 90% (1 minus the initial payout), to arrive at a hypothetical estate value of 1.94MM had the payout not occured. Then divide that evenly among the beneficiaries, so each gets ~$648,000. Once you you give that to B and C from the actual 1.75MM estate, whatever is left of the actual estate goes to to A; here, ~$453,000.
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Re: Early inheritance for one - how to equalize disbursement?

Post by g2morrow »

bryanm wrote: Fri Feb 14, 2020 12:18 pm
123 wrote: Thu Feb 13, 2020 1:57 pm As long as you keep in mind the percentage of the estate distributed to each beneficiary it is (relatively) easy. But you do need some historical numbers to do it accurately.

Example: Beneficiary "A" got an "advance inheritance" of $100,000 five years ago when the total value of the estate was $1 million (value of assets in various accounts and real estate/home equity). Beneficiary "A" has thus already received 10% of the estate.

Death subsequently occurs and the value of the estate at the time is $1.75 million. Beneficiary "A" is to get 33% of estate but has already received 10%. Accordingly beneficiary "A" gets 23% of $1.75 million ($1,750,000 * 0.23) = $402,500.

The other two beneficiaries divide the remaining balance of the estate since all 3 were to share the estate equally. Therefore $1,750,000 - $402,500 gives $1,247,500 to divide between the remaining two beneficiaries. Each would get $673,500.

With this method you divide up the estate "pie" equally over time. Yes it is possible that the value of the estate could go down over time (due to medical or nursing home expenses for example) but this method accommodates that.
I'm not sure how much it matters, but I think the math here is slightly off to the detriment of A. You shouldn't just reduce the percentage payout by 10%, because the 1.75MM is already only 90% of the estate. If you do the math with zero growth it's more intuitive. Giving A 23% of $900,000 gives her $207,000, plus the $100,000 disbursement means $307,000, still shy of a true third.

I believe the correct math would be to divide the final estate by 90% (1 minus the initial payout), to arrive at a hypothetical estate value of 1.94MM had the payout not occured. Then divide that evenly among the beneficiaries, so each gets ~$648,000. Once you you give that to B and C from the actual 1.75MM estate, whatever is left of the actual estate goes to to A; here, ~$453,000.
the two post right here is exactly why I'm so confused.
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Re: Early inheritance for one - how to equalize disbursement?

Post by bryanm »

g2morrow wrote: Fri Feb 14, 2020 12:54 pm [...snip...]
the two post right here is exactly why I'm so confused.
Sorry! I'm actually agreeing with 123. It's just that his math is a bit off. If you want to use the percentage method, you can't just subtract the initial distribution from the final distribution. You do that first, and then you divide that number by whatever percentage of the estate remains. So, instead of 23%, the percentage is 23% divided by 90% (the remaining estate), or 25.89%.

In formula form, the "lower portion" beneficiary percentage is: (Desired total portion of estate - portion already received) / Percentage of estate left after initial distribution. So, if each child gets 1/3, and 10% has already been received, the math is: (33.3% - 10%) / 90% = 25.89%. The other two kiddos divide the rest evenly.

The only difference from 123's post is that A gets a bit more than 23% of the remaining estate.
Last edited by bryanm on Fri Feb 14, 2020 1:44 pm, edited 2 times in total.
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Re: Early inheritance for one - how to equalize disbursement?

Post by Afty »

Whatever plan you come up with, make sure to run it by all 3 of the siblings (and Mom of course) and get agreement on it. Fairness is subjective, and things will go poorly if one of the siblings thinks the plan is unfair, even if it seems fair to the other 2.
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Re: Early inheritance for one - how to equalize disbursement?

Post by Random Poster »

Perhaps I’m just grumpy today, but I think that maintaining family harmony is overrated.

I also think that when one child unilaterally (effectively) changes the deal after the fact, any concern for fairness should be ignored.

So what would I do, given the new information?

Split the inheritance two ways, between the two children that didn’t get the advance inheritance, and cut the sister/daughter out completely.

She had her chance to be honest and fair and she declined to do so. Now (or when mom dies, actually) she gets to face the consequences for doing so. And I’d say so in the will so that if and when a will contest comes, the rationale is made clear to the daughter/sister.
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Re: Early inheritance for one - how to equalize disbursement?

Post by Goal33 »

Can the money to the 1/3 be structured as a loan with a reasonable interest rate? Then loan and all interest can be paid off using their share of the inheritance at that time.
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g2morrow
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Re: Early inheritance for one - how to equalize disbursement?

Post by g2morrow »

bryanm wrote: Fri Feb 14, 2020 1:03 pm Sorry! I'm actually agreeing with 123. It's just that his math is a bit off. If you want to use the percentage method, you can't just subtract the initial distribution from the final distribution. You do that first, and then you divide that number by whatever percentage of the estate remains. So, instead of 23%, the percentage is 23% divided by 90% (the remaining estate), or 25.89%.

In formula form, the "lower portion" beneficiary percentage is: (Desired total portion of estate - portion already received) / Percentage of estate left after initial distribution. So, if each child gets 1/3, and 10% has already been received, the math is: (33.3% - 10%) / 90% = 25.89%. The other two kiddos divide the rest evenly.

The only difference from 123's post is that A gets a bit more than 23% of the remaining estate.
So I see what you're saying and you're correct, its just slightly more then 123's way. I ran some numbers on a third way mentioned earlier.

IF the early inheritance is 10% of the beginning value of $1mil and the end value of assets is $1.75 mil the new estimated gift would be $175k. This 175k would be given to each brother and the rest ~ 1,750,000- (175,000x2) would be equally divided by 3 which is what the sister gets $466,666.

123's way - early inheritor $402,500 - 23%
bryanm' way - early inheritor $453,000 -25.89%
3rd way - early inheritor $466,666 - 26.67%

So in each calculation, the early inheritor would get a little more money and the last way might be the easiest to dole out and get the least complaints.

My head feels likes its gonna explode - I feel as long as its close to being fair thats good enough. Man, I don't get paid enough for this.
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