I recently read in Liz Pulliam Weston’s “Ask Money” column <http://www.latimes.com/business/la-fi-montalk-20150111-column.html> the unfortunate story of an executor who made a mistake in dividing his mother’s estate according to what he thought she wanted instead of what the will read. The problem was that the mother transferred some properties to her children before she died, but didn’t equalize the transfers. The executor divided the estate to make the totals equal instead of leaving what was left in the estate equal – which was to his advantage until his sister complained. Similarly, I once represented an executor who had to decide how to distribute property that the testator had taken out of a trust before he died, and which the will did not put back in the trust. The problem is that people forget that wills apply to property at the time the testator dies, and not at the time the will is signed.
A will is a “when I die” document. “When I die, I want my spouse to get . . . .” The reason wills don’t affect property immediately is that people’s property changes, and, more importantly, people’s minds change. If Herman Munster’s will reads, “I leave my house, located at 1313 Mockingbird Lane, to my son Eddie Munster,” but the Munsters eventually sell the house, Eddie might be left without an inheritance. On the other hand, Herman could decide instead to deed the house to Lily, in which case Eddie would have to wait.
So, if you do have a fair amount of property and you want to start giving it away before you die, but you want the totals to be equal, what do you do? There are at least two approaches to consider, but both have problems.
First, you could make certain that each time you give something away, you make sure that everyone gets the same amount. This is a fairly common approach used when people want to reduce the amount of property that might be taxed when they die, but itmight lead to tax issues if somebody gets more than the annual gift tax limit (currently $14,000) per year. It also means that the gifts are likely to be limited to cash and stocks, which are easy to value accurately.
Second, you could have your will or trust written to distribute your property so that the total of your estate when you die plus all gifts given after a specified date be divided equally. This, unfortunately, will require careful recordkeeping. In addition, if you give gifts other than cash, you’re going to have problems with gifts that appreciate or depreciate. If you mean to use the value at the time of the gift, you’ll probably have to state that in the will, and if someone gets the mountain lot that turns out to have a gold mine but someone else gets the rental property that the tenants used as a meth lab, one of the recipients is going to be very unhappy. On the other hand, if you mean the value at the time of your death, you’re running the risk of property changing value beyond your control.
Overall, therefore, combining equal distribution with gifts before you die requires careful planning. If that is your plan, you almost certainly want to discuss with a lawyer how to make it work and how to minimize the risks of the plan. On the other hand, if you are executor or trustee for someone who you think intended such a plan, you should read all of the available documents before actually equalizing the total. If you’re wrong, you could get yourself in trouble.