'We were all set to enjoy our retirement': My son invested in startups and we bailed him out with $100,000. What now?

By Quentin Fottrell

'When we agreed to help, it was with the understanding that this debt would be paid back with his share of inheritance'

Dear Quentin,

My husband and I have been retired for the past seven years. We had good jobs, saved and we now have some financial security. We downsized from a four-bedroom to a two-bedroom home, from two cars to one. We bought prepaid cremation plans, and we continue to save where we can. Several years ago, we drew up our will with an attorney and placed the appropriate assets in a revocable trust.

It sounds like we were all set to enjoy our retirement. Right? My son, however, has had financial problems. He joined some promising startups; however, startups don't always take off. He has a wife and a young daughter who needed his support. Without the means to support them, he turned to his parents. When we agreed to help by giving him $100,000, it was with the understanding that this debt would be paid back with his share of inheritance.

He now has a steady job and no longer needs our help. How do we fairly document this debt in our will and take into consideration that he is not the only beneficiary? Do we simply take it out of his share of the inheritance and ignore the fact that the other beneficiaries would have received a bigger share of the inheritance, if not for his debt? Once we determine an equitable distribution, how do we document this in our will?

Mom in California

Related: 'I'd rather wear a potato sack': I'm a bridesmaid at three weddings. The brides chose ugly dresses - and I'm obliged to pay. Should I say no?

Dear MIC,

You deserve to enjoy a peaceful and guilt-free retirement.

Your plan should be twofold: 1) Be transparent with your son so he knows what you plan to do; this is not necessary, of course, but it will help offset any hurt feelings after you're gone and, ideally, give him time to get used to the idea that he will inherit X instead of Y. When a loved one dies, it can bring up all sorts of family dysfunction to the surface, so the more honest and respectful you are about the differing inheritances, the easier probate should be.

And 2) Be as specific as you can in your will. Include the reason why you don't want to leave your children equal amounts: it could come down to one child being richer than the other, or being housing insecure or having chronic medical issues, or simply because of favoritism. There is a difference between "equal" and "equitable," and no one is entitled to receive anything from a parent. It's your money and your choice to distribute it as you see fit.

You could also leave a "letter of instruction" in your will. These are often used to detail miscellaneous issues such as a list of life-insurance documents, bank statements and income-tax returns, and how you would like your personal items distributed, and so on. But you can also detail your reasons for leaving one child X and the other child Y. You can also include a "no-contest clause." If an heir contests the will and loses, they forfeit their inheritance.

There is no right or wrong way of doing it, as long as you are crystal clear about your intentions, and write a will with the help of an experienced trusts and estates attorney; each last will and testament is unique. If a parent loses a child, for example, they may choose to leave that share of their late child's inheritance to that child's children. You gave your son financial help when he most needed it, and I trust that he will ultimately understand that.

Tax and legal implications

Next, a legal consideration. It's important that you prepare for this now because, as in many cases of family loans, they are not registered as a standard loan agreement, meaning that the money you gave your son is probably - in the eyes of the law - a gift. California does not enforce a state gift tax, but there are federal taxes. You can give up to $18,000 in cash or property without having to record the gift in your tax return.

There are good reasons for debts to be recorded, lest they be considered a gift. "When an heir or a beneficiary owes money to a deceased person, a signed acknowledgment of the debt, or an agreement to offset it from the beneficiary's share of the estate needs to be located," according to the BPE Law Group. "As well, significant income-tax consequences could exist when forgiving or canceling a debt."

If there is no record of the money you gave your son and you leave him $100,000 and leave your other child or children $200,000 each, he could - as a direct beneficiary - contest the will and claim that your children put you under duress to leave them more money than you left your son. You may think that to be unlikely, but people do the strangest things when there is a great deal of money involved in an inheritance.

Case in point: This letter was almost the opposite of your dilemma: the son in question, who was living in an assisted-living facility at the time he wrote to me, said he was aggrieved that his late mother had actually gone ahead and deducted his debt to her from his inheritance. In that case, he borrowed $20,000 in 1996 and in the intervening years only repaid $5,000 of it. As he told me, "I need every cent of my inheritance."

Money should be a gift rather than a burden. Enjoy your freedom.

The Moneyist regrets he cannot reply to questions individually.

Previous columns by Quentin Fottrell:

'He was recently taken to the hospital': My elderly neighbor gave me power of attorney. Can his estranged daughter object?

'He's quit talking to me': My father, 83, suffers from hoarding disorder and dementia. How can I help him and protect his estate?

'Punishing myself would not help': My credit card was stolen - the thief revealed lots of nasty surprises about my finances

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-Quentin Fottrell

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04-28-24 0624ET

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