Pint of Craft BeerA primary purpose of estate planning is to determine what a child will inherit (if anything) upon a parent’s death.  But what about a gift given during the parent’s life?  Is it an advance on the child’s inheritance, like putting it on the child’s tab until the trust is cashed out?  Or is the gift in addition to anything the child will get upon the parent’s death?  The answer in California depends on the parent’s intent when the gift was made – more specifically, whether the parent wanted it to be an advance.  The problem is determining the parent’s intent after death.

California Probate Code section 21135 describes the circumstances under which a lifetime gift will be considered an advancement against a beneficiary’s inheritance.  In Sachs v. Sachs (2020) ___ Cal.App.5th ___, the Court of Appeal examined Section 21135 and concluded that a parent’s written records of lifetime gifts established them as an advancement against a child’s inheritance.  This opinion provides guidance to parents who make gifts and to siblings in conflict over them.

Dad Tracks Gifts to His Children

In 1980, David Sachs established a trust that named his two children, Benita and Avram, as the main beneficiaries upon his death.  During his lifetime, David gifted money to his children and tracked the money he distributed.  He made no secret about this and told his children he was tracking the distributions on papers he referred to as the “Permanent Record.”

The Permanent Record consisted of a separate file for each child with each file containing several papers of various types.  The papers listed the dates and the amounts distributed to each child and the entries were made with different pens, indicating that David made the entries as he made distributions.  Benita later discovered the Permanent Record among David’s papers.

After some health issues, David hired a bookkeeper to manage his finances.  David would instruct the bookkeeper to make distributions to Benita and Avram, and he was adamant that the bookkeeper keep a record of the distributions.  He told the bookkeeper on more than one occasion that keeping the list was important so that payments made to his children would be deducted from each of their inheritances.

Benita became successor trustee of the trust after David’s health continued to fail. The bookkeeper told Benita that David’s residential care expenses and the distributions to Benita and Avram were draining the trust assets.  Benita resisted when Avram continued to ask Benita for distributions from the Trust, which naturally caused a strain in their relationship.  Avram assured Benita in emails that any distribution to him “would go on my record,” and also acknowledged that previous distributions from David would be on his record.

Avram later changed his tune and began arguing that the Permanent Record did not exist or could not be used to determine advances against his inheritance.  After David’s death, Benita sought the court’s assistance to determine whether the gifts were advances, which would equalize the distribution of assets from the trust.  By the time David died, Avram had received over $450,000 more than Benita.

When Is a Lifetime Gift Considered an Advancement?

Probate Code Section 21135 provides that a distribution of money is considered an advance against an inheritance in any one of the following situations: (1) the trust or will states that lifetime gifts are to be deducted from an inheritance, (2) there is a contemporaneous writing by the transferor that a lifetime gift is to be deducted from the inheritance, (3) the beneficiary acknowledges in writing that a lifetime gift is to be deducted from his or her inheritance, or (4) the gifted property is the same property that’s identified in the trust or will.

The Court of Appeal found that both the second and third situations were satisfied in the distributions from David to Avram.

To meet the contemporaneous writing requirement, David did not need to use a special form or even sign any of the papers he used to track the gifts.  The Permanent Record was written in his hand and appeared to be contemporaneous since the entries were made with different pens and written on different types of paper.  It was found that the existence of the Permanent Record in and of itself was highly persuasive and that keeping such a record would seem to have no purpose except to equalize distributions between Benita and Avram.

The court also held that Avram’s emails to Benita stating that any distribution to him “goes on my record” satisfied the beneficiary acknowledgement provision of the statute.  Avram argued that his statement was too amorphous to constitute acknowledgement and that the statement was not made to David.  However, the court held that Avram’s statement was made in the context of his request for a distribution and that Section 21135 does not require the acknowledgement to occur at the same time as the distribution.

Avram also tried to argue that “parole evidence” could not be used to determine David’s intent but the appellate court disagreed.  Probate Code Section 21102 provides that extrinsic evidence is admissible, if otherwise allowed by law, to determine the intent of the transferor.  The appellate court held that nothing in the language of Section 21135 precludes the use of extrinsic evidence to aid in interpreting David’s intent with the Permanent Record.

Take Away

Recordkeeping matters.  In Sachs, the probate court found that Avram received $451,027 more than Benita in lifetime distributions, such that she was entitled to an equalizing distribution in that amount.

Parents or other individuals who want to ensure that their beneficiaries end up with equal amounts should track lifetime gifts and specify in writing that they are meant as advancements.  The tracking system need not be attached to the trust or will, but should be kept contemporaneously with the making of the gifts.

A beneficiary who acknowledges a lifetime gift as an advance may backtrack when it comes time for a final distribution.  To avoid or reduce such litigation, donors would be wise to keep clear records and maintain them in a secure way.