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This is Stewart Albertson with Albertson and Davidson, and I want to talk to you about an issue that we do see from time to time called advances on inheritance. Advances on inheritance are essentially a loan that mom or dad makes to one child. They don’t want to be unfair in giving that loan to one of their children when they have several other children. So they basically tell the person they made the loan to, well that is an advance on your inheritance so that when I die, you’re going to have to take that into account based upon whatever your share of my estate is.
There’s a real problem with advances on inheritance though because the probate code has some technical requirements that must be met to qualify as an advance on inheritance. Otherwise, that payment of money from a parent to a child will be looked at as a gift. If it’s a gift that makes a big difference because when the estate is distributed after mom and dad have passed away it’ll be distributed equally between all of the children without taking into account the “loan” that was made to one of the children during lifetime.
So how can you tell the difference between an advance on inheritance and a gift? The advance on inheritance can be proven in three primary ways. There’s actually a fourth way, but that gets a little complicated. If you really want to look into this, you can go to Probate Code section 21135, and you can read how you establish an advance on inheritance there.
Generally, the way you prove an advance on inheritance is:
- The trust or will terms themselves have in there saying, I’m giving $100,000 loan to my son Johnny, and when I die, this counts as part of his inheritance at the time he receives his ultimate distribution. That’s the first way that an advance on inheritance can be included and be supported by the evidence.
- The next way you can establish an advance on inheritance is did your mom or dad have a writing outside the trust or will that simply says: I hereby am making a loan to Johnny and after I die, that should be considered as part of his inheritance for distribution purposes. That would be the second way that you can establish an advance on inheritance.
- The third way is you have Johnny acknowledged in a writing that he’s already receiving some of his inheritance by way of a loan prior to mom and dad passing.
If you have any of those three, chances are you can establish an advance on inheritance.
As you can see, this is not always easy to do. If there is money that is given to one child, a lot of money, say several hundreds of thousands of dollars to one child and not to the other, and there’s nothing to establish an advance on inheritance, what is the argument the child makes who received the money during the parents’ lifetime? And that is, it was a gift. If it’s a gift, it won’t be chargeable against their share of the estate. It won’t be an advance on inheritance.