Splitting an appreciating asset based on past loan values

mcstafford

Morning! This is my little mathematical challenge :-)

• 4 children to receive equal shares of a house on the death of the owner (parent)

• 3 of the children have received cash loans of different values already

• 1 of the children has received no loan

• House owner (parent) wants to achieve some form of equality

• Proposal to determine value of each loan as a percentage of the house's current value

• Proposal to apply this "percentage deduction" to the future sale value of the house for each child that received a loan

• Say the three children's deductions are: Child 1 - 10%; Child 2 - 8%; Child 3 - 5%)

• Once the deduction is made from the "sale value" at some point in the future, there is a "residual" percentage of 10+8+5 = 23%

• Does this whole 23% get "added" to the share of the fourth child (no loan) or does something else happen to it?

• (The purpose of the exercise is to make sure the fourth child is not "disadvantaged" by the time-value of money, by tracking it to a house price that will increase over the coming years)

Thank you in advance - I have got my head totally lost on this little issue!
Matt

DandelionPatrol

Remember that when the loans are repaid, 1/4 of the repayment goes back the the child who borrowed and 3/4 is split between the other 3.

So take each child's loan percentages off their share and add 5.75% [1/4 of 23%] back to each child.

Stevie_Palimo

You could make it simple by either calling in the said loans or giving the 4th child a loan, Make sure they all had equal amounts each meaning it is so much easier than a complicated issue of you have had more than me which will no doubt cause several fights between them all.

SeniorSam

Presumably there will be no inheritance tax problems, as if that was likely, then the loan values would need to be added to the estate, rather than gifts which may fall outside the estate value after a perio of time.

However. the suggestion made by Stevie Plimo is by far the best way to avoid arguements at a later date, which could be brought about by the present value, which can only be assumed.

mcstafford

Thank you. I agree with the "simplest approach". The problem is that two of the three with loans are not, and will never be, in a position to repay the amounts "loaned" (there was never any intention of them being repaid) or even to balance them out so we all "owe" the same.....

mcstafford

Oh, and the "present value" will be provided by an average of three estate agents - which we have all "agreed to agree with", if that makes sense :-)

mcstafford

That's where my wife ended up with it.....I just couldn't get my "social sciences" brain around the logic!!!

getmore4less

Are they loans or gifts?
Do you have debt on this asset?

jackyann

We have been there. Not sure if this applies to you, but we had decided our loans were interest free.

We keep a document that keeps track of major loans (obviously not the odd tenner!) and repayments.

When we die, the estate will be dealt with as usual. The proportion that is to go to 5 children will be put into "hotch pot". This means that any outstanding loans are taken into account when it is shared out.

This means you don't have to fiddle about valuing the estate now. It does mean:

you have to keep formal track of loans & repayments (we write formal letters & store copies with our wills)
your estate at death does have to be enough to cover whatever is needed - which means that if circumstances change significantly (selling the house for care home fees for example) you would have to change the will in some way - we review ours every year to take account of this.

you do really have to go to a solicitor for this - hope it helps

getmore4less

The problem is that using loans at net debt does not take into acount present value which can be seen as disadvantaging the ones that get smaller/no loans.

simple example, you have 3 kids, and you give 1/3 of your assets to one but nothing to the other 2.

10 years later all the assets are worth twice as much and you die.

1 has an asset worth twice as much but only pay 1/2 back to the estate which then gets split 3 ways.

your original asset base is now split 8/18 5/18 5/18

Mojisola

You are assuming that there will be a property to sell. If the surviving spouse goes into residential care, there may not be enough left to redress the inbalance between the children.