Welcome to the first edition of Did You Know? The aim of these articles is to inform our readers of elusive, or frequently asked topics regarding will writing and their practical uses.
A frequently asked question we receive is regarding the best way of reducing the gift a beneficiary would receive if the testator has loaned or gifted money to that beneficiary. There are a few methods of achieving this, however the best (and cheapest) way is to include a Hotchpot clause in the will.
What is a Hotchpot clause?
Practical Law defines a Hotchpot clause as; where the testator wants any absolute gift, made to a beneficiary under the will, to take account of any lifetime gift to that beneficiary.
This means that on the death of the testator, the executors are required to search for any records of gift or loans the testator made to the beneficiaries of the will. They are then required to reduce the gift made by the will by the amount gifted, or outstanding, and distribute this sum to the other beneficiaries. The primary reason for including such a provision is to ensure that all the beneficiaries of the will receive an equal share of the testator’s estate after he/she has passed away.
This can also be used to show that the testator has shown consideration for the recipient of the gift by making provision in the will, therefore not excluding them, but ensuring the eventual distribution is even, reducing any risk of a successful claim due to lack of reasonable provision.
What does the testator need to do?
Ideally, once the testator has made any substantial gifts or loans, he/she will need to ensure that they keep records of the gift/loan in a safe location where the executors can find it. The best place would be with the will.
If the testator has made a loan to a beneficiary, then the testator would need to ensure they record any instalments that the recipient makes while the testator is still alive. This will allow an equal and fair distribution of the estate on death.
Are there any alternatives?
At the time of making gifts or loans, recording it is not always the first thing that clients will think of. WillPack have received instructions where loans have been made but there are no written agreements regarding instalments to repay the debt. Our initial advice is to retrospectively have a loan agreement drafted and signed. The testator may need to contact a financial adviser for this.
If this is not possible, or if this is a gift rather than a loan, the testator could make a gift in the will for the amount gifted or loaned to the other beneficiaries before the Residuary Estate is distributed. However, the main problem with this is if the testator made a loan that is being repaid in regular instalments, this would result in the testator needing to re-write their will often. This would be a very costly exercise. Making further gifts to any of the beneficiaries would incur the same need to re-write the will.
Another option to consider would be to direct the estate into a discretionary trust on the death of the testator. The testator would need to write a letter of wishes to keep with the will to inform the trustees of their intentions and the reasons for not gifting the estate absolutely. However, a discretionary trust does cost more to draft into a will, as well as the estate incurring further costs on death in order to create the trust. The trustees are also not legally bound to follow the instructions in the letter. If this is the preferred option, it would be advisable to appoint independent trustees.