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How the economic crisis is affecting your children’s inheritance

By: Laura M. Torres González, Esq.
Senior Wealth Advisor / Assistant Vice President
Wealth Management Divison, BPPR

The economic crisis encountered in the past several years has taken its toll on the inheritance children receive from their parents. Not only has the estate diminished dramatically, but also we are experiencing a way of life in which parents have begun to donate in life their estate to their children. How beneficial could this be? What precautions must be taken when doing so?

In general terms, children are the mandatory heirs of their parents. The law establishes that a certain portion of the estate of the testator must be reserved for the mandatory heirs, through what is known as forced share. Thus, if the father were to draw a will, for it to be valid, the father has the obligation to grant the forced share to his children. In the absence of a will, the estate is distributed in equal parts in conformity with the law, with the children first, followed by the descendents.

It is important to highlight that donations received by an heir are subject to the hotchpot rule. Hotchpot is nothing more than adding to the value of the estate the goods that were donated to the children for the distribution of the inheritance. The effect of the hotchpot is that the child will receive less from the inheritance since the value of what that child received as donation is deducted from the value of the estate. The reason for this is that nobody can receive more through donation than what would be received from the inheritance.

Economic difficulties have forced the current generation to have less economic resources than their parents. Certainly, the effects of the market, the rising cost of living, unemployment, low interest rates on accounts and low expectations of getting back what has been contributed to social security show that the work force is facing difficult times, and not to mention when it is close to retirement.

All of this has caused parents to help their children more, contrary to previous decades. It should be pointed out that expenses for food, education and the usual gifts are not donations. On the contrary, when a house, apartment or business, among other things, are given as gifts, there might be a violation of the forced share. Thus, the way to avoid donations from being brought into hotchpot is that the advancer clearly puts it in the will or in a public document at the time of making the donation.

On the other hand, even if the advancer exempts the donation from the hotchpot, it cannot be higher than what the child might receive by inheritance. In the event you want to make donations in life to your children, remember that it is important to consult your Financial Planner regarding the most efficient mechanisms through which your interests, and your heirs’, are protected.

The suggestions and recommendations included in the financial plan are offered only as an advice, with no guarantee of the yields of any product that may have been acquired pursuant to such recommendations. Banco Popular de Puerto Rico, its subsidiaries and affiliates, do not engage in the offering of accounting, legal or tax advice. If you need accounting, legal or tax advice you should request the services of a competent professional in these areas. Certain restrictions may apply, for more information please contact one of our service centers.