What is a Hotchpot Clause and Why is it Used in Wills?

A Hotchpot Clause is a provision in a will or trust that aims to ensure fair and equitable distribution of an estate among beneficiaries by accounting for lifetime gifts or loans made by the testator. The term “hotchpot” literally means “a mixture of property” and has been used in estate planning since at least the 12th century.
 

Purpose and Function

The primary purpose of a hotchpot clause is to:

1. Equalize benefits among beneficiaries
2. Consider lifetime advancements or gifts
3. Prevent disproportionate distribution

When implemented, the clause requires executors to add the value of lifetime gifts or loans back into the estate before distribution and then deduct those amounts from the relevant beneficiary’s share.
 

How It Works

The process typically involves:

1. Adding lifetime gifts/loans to the total estate value
2. Calculating each beneficiary’s share based on the new total
3. Subtracting the value of gifts/loans from the relevant beneficiary’s portion

For example, if a parent with a $1 million estate and five children gave one child a $50,000 gift during their lifetime, a hotchpot clause would ensure that this gift is considered when dividing the estate. The child who received the gift would get $50,000 less from the estate than their siblings.
 

Advantages

1. Ensures fairness among beneficiaries
2. Reduces the risk of contentious claims
3. Allows parents to help children during their lifetime without creating long-term inequalities.

Implementation

To effectively use a hotchpot clause, testators should:

1. Keep accurate records of gifts and loans
2. Store documentation with the will
3. Clearly communicate their intentions to beneficiaries.

A hotchpot clause is a valuable tool in estate planning, allowing testators to balance lifetime gifts with inheritance and maintain equity among beneficiaries. While not universally applicable, it can be particularly useful for parents who have provided significant financial assistance to one or more children during their lifetime

As a refinement, remember that a gift of, in our example, $50,000.00 provided years before death will grow substantially with inflation. To be fair, consider an inflation provision so that a $50,000.00 gift in 2000 is valued in 2025 at its current value.

Please reach out to Peter with any questions

You might also like our blog post on Navigating TFSA Inheritance