It may sound like a delicious dish but a hotchpot is actually an estate planning tool used in many Trusts and Wills. While it is also used in other contexts, as an estate planning doctrine, this technique dates back as early as the 12th century.
Our children are usually the first people we want to inherit our wealth after we die. If we have more than one child, and we love them all equally, we want them to share in our estate equally, as well. However, sometimes our children have different financial needs during our lifetime that could make an equal inheritance perceived by others (or even them) to be unfair. For example, perhaps one of your children received a substantial gift from you for a down payment on a home, or to satisfy their debts, or fend off a foreclosure. In light of such a gift, would it be fair to your other children if that child also inherited an equal share of the remainder of your estate? Many people do not think so.
When to Use a Hotchpot in Your Will or Trust
Fortunately, there is a solution to this dilemma. A hotchpot is an estate planning tool that is created by adding a clause to your Trust or Will that takes into account gifts made to your children during your lifetime when dividing up your estate after your death. With a hotchpot clause, such gifts are treated as advancements against a child’s inheritance. These advancements are “brought into hotchpot.” In other words, they are added to the value of your estate before it is divided up, and then deducted from the recipient’s share.
Here is a simple example. Let’s say you have an estate worth $240,000. Then let’s assume you have three children-- Annie, Betty and Charlie, and you want your estate to be divided equally among them. However, two years ago you gave Charlie a $60,000 gift to help him purchase a home. If you have a hotchpot clause in your Trust or Will, the gift you made to Charlie during your life will be “brought into hotchpot” and added to the value of your estate, so that your estate would be treated as having a value of $300,000 ($240,000 plus the $60,000 advance to Charlie). Each child’s share would be $100,000, but Charlie will be treated as having already received $60,000. As a result of the hotchpot, Annie and Betty each receive $100,000, and Charlie receives $40,000 ($100,000 minus the $60,000 advancement).
When NOT to Use a Hotchpot in Your Will or Trust
It is important to remember that there are many legitimate reasons why someone would not want to use a hotchpot to equalize the inheritance among children. For example, perhaps a child had special needs or other disadvantages over his or her siblings or perhaps a child contributed in ways to your own well-being that you want to recognize in your estate plan. A hotchpot is by no means universal in estate planning, but there are many circumstances where it is useful and desirable.
If you think a hotchpot could be appropriate for your estate plan, contact your estate planning attorney to discuss this option.
