June 7, 2013

Class Gift

On occasion, a person will want to leave an inheritance for a group of relatives. This is known as a class gift. For example, a person could write a will or trust that gives $100,000 to be split amongst his "grandchildren."

If a person writes a class gift clause in a
document, there are a couple of issues to take into considerations. 

First, the person should specify what will happen if one of the beneficiaries predeceases the person. This is known as lapse. In order for a beneficiary to inherit, they must survive the person.
Assume Thierry wants to leave a gift of $100,000 to his 4 grandchildren as a class gift: Laurent, Bacary, Gael and Mathieu. Gael passes away in a tragic hot air balloon accident in 2013 . Thierry then passes away in 2014 (yes I can predict the future). 

The question then posed is whether Gael's $25,000 inheritance goes to the other grandchildren or some other person. It would be prudent for Thierry to delineate what happens to the share of a predeceased beneficiary, namely Gael. He could either state that the Gael's share goes to the surviving grandchildren, the residue of his estate or something else. Regardless, it is best to be precise because resolving an ambiguity in a will is typically arduous, lengthy and costly.

Second, the person should define the class. For instance, if the gift is to the children, they should specify how "child" is to be defined. 
For example, child does or does not include an adopted child, a step-child, a child born out of wedlock, etc. By not defining the term, relatives can conveniently come out of the woodwork and claim to be a rightful beneficiary. Money, rightfully or wrongfully, is a great motivator in life.

Third, the person should specify when the interest vests. For example, the person should mention if the inheritance is payable immediately when they die or the beneficiary must wait until a later time to collect. It is common to withhold an inheritance from a young person given the typical inclination of youth to engage in profligate spending. Hence, a clause which provides for distribution when the beneficiary reaches 25 is common.  Furthermore, it is imprudent to provide a child with a large inheritance. Generally speaking, if a child receives greater than a $5,000 inheritance outright, a court-supervised guardianship will be needed until they turn 18. This guardianship is both time-consuming and expensive.