Today’s parents often support their children well past completion of post-secondary education. For example, they might assist with a down payment on a house, help fund a business or pay for their grandchildren’s education. But what clients think is a generous gesture can lead to problems and potential disputes involving their estates or children.

If your clients want to advance money to adult children, ensure they clarify whether the money is a gift or a loan. This is particularly important in the following scenarios:

When creating supporting documentation

Along with clarity of intention, proper documentation is key. That means being specific. If a loan is made, ensure clients complete supporting documentation, such as a promissory note, loan agreement or registered mortgage on title of the child’s home. Proper documentation provides protection for your clients in the future if they decide to enforce loan repayment.

If your clients’ intention is to gift or advance money to adult children, this should be specified in writing or in a deed of gift. Case law holds that in the absence of proof of the donor’s intention, courts will presume assets transferred to an adult child aren’t a gift or an advancement (Pecore v Pecore), but are still owned by the parent and held by the adult child in trust for the parent, which may result in litigation. The burden would then be on the child to provide evidence that a gift was intended.

Read: Estate freezes: when estate and family law converge

When there’s inequality among children

If your clients have loaned or gifted assets unequally among their children during their lifetime, they may want to address this inequality in their wills through an equalization provision. Options include bequeathing a legacy to the children who have received less or adding a hotchpot clause.

A hotchpot clause considers gifts, loans or advancements to the children during the parents’ lifetime in the value and division of the estate, and is used to calculate how the estate is divided among the children, subtracting the advances from each child’s portion as applicable.

For example, consider a client with three children. Child 1 receives a $100,000 loan for a down payment on a home, child 2 receives an $80,000 loan because of financial problems and child 3, being independent, receives no loan. The client’s estate is worth $750,000 at date of death (net of all loans, which are forgiven), but the client wants the children treated equally. That means each child is entitled to one-third of the estate.

To determine this amount, the forgiven loans must be added to the value of the estate, with the sum divided by three, which totals $310,000 [($750,000 + $100,000 + $80,000) ÷ 3)]. Child 1 is entitled to $210,000 (less $100,000), child 2 is entitled to $230,000 (less $80,000) and child 3 is entitled to the full $310,000.

In cases where children have received significant loans, a hotchpot clause may be used to offset debt up to a specified amount if the value of each child’s share from the estate would be less than the loan received.

In cases where a child is estranged, your clients might want the children to be treated unequally. But this intention should still be addressed to provide clarity upon death and prevent disputes, whether in the parents’ will (possibly along with an anti-litigation clause), a companion memorandum or letter of wishes.

Read: Opportunities and pitfalls for foreign inheritances and beneficiaries

When a marriage breaks down

A child’s marital breakdown can call into question whether parents intended to make a gift or a loan. Clients should be clear about their intentions when transferring assets or property to their children, and realize that the timing of the gift or loan can affect who owns the property upon marital breakdown.

Under Ontario’s Family Law Act, gifts from third parties during marriage are excluded from net family property and aren’t subject to equalization. Further, gifts received prior to marriage are a deduction only, and post-marriage income and gains are shared, unless a domestic contract provides otherwise. A matrimonial home has special treatment and its value is not deductible if owned at date of marriage and marriage breakdown.

Read: Should clients get family loans to make mortgage down payments?

It may be preferable to make a loan to a child rather than a gift, particularly in respect of the child’s matrimonial home. That’s because under Ontario family law, the loan reduces the net value of family property upon marital breakdown, meaning it is not included in the calculation for equalization payments and the child would not have to share the value with the ex-spouse. On the other hand, a gift used to acquire or improve a matrimonial home, or to pay down a mortgage, is included in net family property and is included in that calculation.

Further, if your clients are using their wills to address inequality among the children, the outstanding loan can continue to reduce the value of the child’s shareable property if the will provides for a continuing trust for the child, which holds the debt.

Your clients should seek professional advice to ensure their wills properly state their intentions for gifts and loans to their children, that they have proper and up-to-date documentation, and that their planning is optimized given the complexity of the issues.