You may want to make gifts of money to one or more of your children during their lifetime for a number of reasons, for example to loan money or even assist with a house purchase. The monies would either be given as a loan or a gift.
It may be that on your death you wish for all of your children to be treated fairly and receive the same financial sums. For example, if child A received £30,000 from you during your lifetime, you may want your other children B and C to benefit the same so that child A has not received more from you financially – in lifetime or in death.
The good news is that this can be achieved and here is where the hotchpot clause comes in.
The hotchpot clause refers to both gifts and loans because it is used not just to take account of any funds loaned to a beneficiary but also any funds that have been advanced to a beneficiary in lifetime by way of gift. This is to create fairness between the treatment of the children, i.e. by treating any gift to a child in lifetime as though it were an early advancement of their inheritance.
It also has a basis in the doctrine of satisfaction – the assumption that a parent would not want to benefit one child twice at the expense of the others.
A hotchpot clause is not asking for the gift to be repaid to your estate. It is merely recognising its existence so that the beneficiary’s share in the estate can be reduced and the end result is that all children have received the same benefit overall.
Let’s take a look at an example of where a hotchpot clause may be used:
Sarah has had debts of £10,000 paid off by her parents. The parents wish to offset the £10,000 against Sarah’s inheritance.
To take account of the £10,000 Sarah has received from her parents, the residue could be shared equally between the children on the face of the Will but a hotchpot clause included to direct the executors to reduce Sarah’s share by £10,000 so the end result is that all children are treated fairly when taking into account lifetime gifts.
In order for the clause to be effective, it relies on you keeping a record outside of the Will of any gifts made and in the terms of a loan, a loan agreement between both parties should be put in place. It must be kept up to date and noted if any repayments have been made during lifetime. The record must be easily located and ideally kept with the Will.
18 August 2021
The views expressed in this blog do not in any way constitute advice and are specific to the date noted. As time passes the facts can change and readers should consult their adviser for up to date advice on any matters covered within the blog. Invest Southwest offers an initial review, which is free of charge, however long it takes. From this we will be able to confirm how we can help and give you an opportunity to decide if you would like us to. Thereafter, we will provide you with detailed recommendations and exact costs. Please note that we promise not to levy any kind of fee unless we can demonstrate a benefit to you.