Splitting an appreciating asset based on past loan values

mcstafford

OK - so to give a little more context (I was trying to keep it simple!)

• Each of three children was lent "an amount". The fourth was lent nothing.
• One approach is to consider the long-term "time value of money" using an agreed rate (RPI, CPI, Bank of England Base, etc.)
• The big issue is that there is no mechanism of repayment - which means that if I want to give the money back, I can't
• The above point probably demonstrates that the money is a gift
• The above point also means that, for the child that has had the loan for longest, and noting that the parents may (we hope) not die for another 30 years, the overall value of the "gift" - if we apply any "rate" to it - could be unmanageably huge.
• To counter this, we considered an alternative:
  • We take the value of each of the three loans, and apply a "rate" to these based on (for example) the BofE base rate, for the period of the loan so far (8 years, 3 years and 1 year respectively)
  • The property in question is valued on a given date (August 2015, for example)
  • The value above is agreed by all parties and "interest" stops accruing on the "gift"
  • The "interest-inclusive" figure is calculated as a percentage of the agreed house value (that's the 10%, 8%, 5% example in the original post)
  • The fourth child (who has had no loan) gets a compromise: they get the "time value of money" up to the valuation date; and they get a greater stake in the accruing asset (the house) instead of future interest
• All points about residential care, there not being enough left, etc. are very valid - and not considered at this stage.

Thanks


Matt

joerugby

I suspect that any such arrangement will fall foul of the law of unintended consequences

jackyann

"Hotch pot" can take account of interest - it just needs updating annually (we chose not to apply interest for personal reasons). I do really think it easier than your calculations Matt, but we all approach things differently!

Here is a fictional example based on our family:

Outstanding loans at last "tally":

A: £25k
B: 20k
C: 5k
D&E: 0

Estate at time of death (really doesn't matter how much it is accumulating!) worth £500k.

A B & C each repay their amounts nominally into the estate = £550k

Distribution = £110k each, so A takes £85k, B takes £90k, C takes £105k and D&E each get their £110k = the £500k that is available.

The only serious problem arises if long term care erodes the value of the estate to less than the outstanding loans. Legally that can be dealt with, but would be awkward.

Our aim is to gift money in the medium term to prevent this, and actually I don't think you need to worry about it too much. Very few people actually spend huge amounts on care, and most have a good bit of notice that it is coming!

mcstafford

Thank you for this detailed reply. This is a good approach, but it doesn't address one problem (I think...) and that's that "Sibling D" (the one with no loan) gets no "value of money" benefit from the fact that everyone else has a loan. At the end in your method, it is a cash figure that is deducted - no interest considered. The issue is that if we consider interest, there could be a massive liability, but if we use pure "cash" as the deduction, there is no real benefit to the fourth sibling. Does that make sense? It's basically perfect for Siblings 1, 2 and 3.....as they just "nominally repay" the value they borrowed.

jackyann wrote: »

"Hotch pot" can take account of interest - it just needs updating annually (we chose not to apply interest for personal reasons). I do really think it easier than your calculations Matt, but we all approach things differently!

Here is a fictional example based on our family:

Outstanding loans at last "tally":

A: £25k
B: 20k
C: 5k
D&E: 0

Estate at time of death (really doesn't matter how much it is accumulating!) worth £500k.

A B & C each repay their amounts nominally into the estate = £550k

Distribution = £110k each, so A takes £85k, B takes £90k, C takes £105k and D&E each get their £110k = the £500k that is available.

The only serious problem arises if long term care erodes the value of the estate to less than the outstanding loans. Legally that can be dealt with, but would be awkward.

Our aim is to gift money in the medium term to prevent this, and actually I don't think you need to worry about it too much. Very few people actually spend huge amounts on care, and most have a good bit of notice that it is coming!

mcstafford

Indeed :-) Hence trying to 'mitigate' with the appreciating value of the house....

getmore4less wrote: »

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

getmore4less

Then you have the senario that sibling 4 is too old to benifit from anything, becoming increasingly common as parents refuse to die.

The value of a small amount to sibling one that got them a house at 25, while poor 4 sees nothing till they are in their twilight years is not measurable as a % of an asset that may not exist.

which sibling are you?

getmore4less

ANother way to do it is to give them all the same amount and let them decide the value of lending to each other and leave the rest of the assets out of it.

jackyann

I take that point. This is the way we see it:

this will is not "for life" (if you understand me!) it is for the next 5-10 years, and within that time frame D & E may take loans, A & B may repay etc. etc.

All children have different personal circumstances, and D & E are not yet at the age where A & B requested loans (eg: to buy a house).

We expect there to come a point at which it seems sensible to even up the amounts by gifting or something similar, and to change the will to reflect that. That point is not yet. We also have no intention of gifting so much that it would be considered "deprivation of assets". In my fictional example, it may mean that everyone gets gifted £25k, leaving the estate value at £375k.



Of course, we all have different things that worry us more or less, this forum helps us consider other points of view.

getmore4less

So these loans to buy a house, are they declared on the mortgage application or down as gifts.

CathA

We have a very similar situation in our family, insofar as we've given a large sum of money to one of our children. Between us we have 5 children and I spent hours with a solicitor trying to sort out how to make it fair when we finally pop off. We have finally got it sorted with a properly drawn up will, but the actual wording of it is written in legalese, which makes it tricky for us ordinary people to understand!!
However, working in banking and accounts for many years, I thought there must be a simple way to explain it to all the kids that is easier to follow, though it took me a long time to work out. Assuming that there is no intention to apply interest to the loans, here's one way of looking at it.

Child 1 owes £30,000
Child 2 owes £20,000
Child 3 owes £10,000
Child 4 owes nothing.

Parent dies, house is worth £200,000
Each child is due £50,000

Child 1 -£50,000-30,000=20,000
Child 2 -£50,000-20,000=30,000
Child 3 -£50,000-10,000=40,000
Child 4-owes nothing so=50,000
Total 140,000

Total so far-140,000 leaving 60,000 outstanding.
Divide £60,000 by 4=£15,000 to each child.

So then-
Child 1 -20,000+15,000=35,000
Child 2 -30,000+15,000=45,000
Child 3 -40,000+15,000=55,000
Child 4 -50,000+15,000=65,000
Total 200,000

In this way it's perhaps easier than a percentage calculation, and apart from the benefit the 3 children have already had with whatever money they have been given, all of them get the same. It also doesn't matter if the house goes up in value as the calculation works on all amounts. Hope this helps.