This is a legit family issue we're debating in settling an estate: 3 siblings (we'll call them Mary, Mike, and Joe) are inheriting $450K from their late mother's estate. The money should be divided equally, BUT last year, Mike borrowed $10K from mom, and it was understood that this debt would be taken into account and settled when the estate was settled. Everyone's first thought was, instead of each getting $150K, Mike would give up $10K, get $140, and Mary and Joe would each get an extra $5K, receiving $155 each. Then we realized Mary and Joe would be getting $15K (not $5K) more than Mike. We recalculated, and figured that if Mary and Joe each got $151,667, and Mike got 146,667, that would total $450K, and Mary and Joe would get $5K more than Mike. But THEN I realized that if Mike had paid the $10K back prior to the settlement, the 3 siblings would be splitting $$460K (not $450K), and Mike would essentially get 1/3 of his money back! So maybe Mary and Joe should get around $151K and Mike around $148 (I can't even do the math, that's why I'm here). What's the right, fair, solution? I'd be having fun with this puzzler, if it wasn't a real-life situation! Thanks in advance!
Estate settlement problem
- Thread starter Bob1964
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Make Mike write an IOU of 10 K and put it in the pile of money. Now the inheritance is 460 K.
Each sibling gets 153333.33 $ and give 0.01 $ to charity.
Mike gets the IOU back + 143333.33 $.
Other two get 153333.33 $ each in cash.
Subhotosh Khan, as always, is correct, but his procedure is not commercially typical.
Your mother was acting like a very generous banker. She made an interest-free loan with repayment due at her death. What she should have done (if she had been a more experienced banker) was to make Mike sign a promissory note back when the loan was made. Then what the accountants call the assets of the estate would have clearly been 460k, 450 in cash and 10k from the note. That 460k is what would have been available IN CASH had Mike not received the loan in the first place or if he had repaid it to the estate upon her death.
Divide 460k by 3. That comes to 153,333.33 with a penny to be dealt with at the end. (I suggest you flip for it after everything else is cleared up.) That is what each of you is owed by the estate. But wait Mike owes10,000.00 to the estate, and until he pays, there is only 450k in cash. No problem. Mary gets 153,333.33 in cash and Joe does too. That adds up to 306,666.66. Subtract that from the available of 450,000.00, and there is 143,333.34 still left. Put a penny aside for later flipping. Give the remaining 143,333.33 to Mike. That is fair. He got 10,000.00 earlier when the loan was made and is now forgiven.
Your mother was acting like a very generous banker. She made an interest-free loan with repayment due at her death. What she should have done (if she had been a more experienced banker) was to make Mike sign a promissory note back when the loan was made. Then what the accountants call the assets of the estate would have clearly been 460k, 450 in cash and 10k from the note. That 460k is what would have been available IN CASH had Mike not received the loan in the first place or if he had repaid it to the estate upon her death.
Divide 460k by 3. That comes to 153,333.33 with a penny to be dealt with at the end. (I suggest you flip for it after everything else is cleared up.) That is what each of you is owed by the estate. But wait Mike owes10,000.00 to the estate, and until he pays, there is only 450k in cash. No problem. Mary gets 153,333.33 in cash and Joe does too. That adds up to 306,666.66. Subtract that from the available of 450,000.00, and there is 143,333.34 still left. Put a penny aside for later flipping. Give the remaining 143,333.33 to Mike. That is fair. He got 10,000.00 earlier when the loan was made and is now forgiven.
Thanks all for your help! I think early on I tried the formula that was the correct one, but it appeared that Mary and Joe were each getting $10K more than Mike, and that SEEMED wrong, but when you figure Mike already received $10K of his inheritance, it balances out. I had gone in circles so long at that point, I thought I needed a more complicated answer! Thanks again!
A lawyer would say that is not law: the debt is 100% Mike’s.
Vary the facts. There is 450k in cash and Mike owes 600k. If you say that Mike only needs to pay 400k (because one third of the benefit of the debt is HIS), then when he pays that 400k, there is 850k in cash to divide up equally. And he will get approximately
600k - 400k + 216k = 416k of his mother’s wealth whereas each of his siblings will get approximately 216k.The siblings will likely view that as a very inequitable result. And no court would condone that result or the reasoning leading to it.
If Mike has the funds to pay the debt, every penny of which is his and his alone, and does pay it in full, then there will be
450k + 600k = 1050k to divide. Each sibling will get the same amount, namely 350k. In Mike’s case, his cash flow will look like
600k - 600k + 350k = 350k.
The legal nightmares start if Mike does not have the 600k to repay the debt. What a court will do in an effort to do equity will depend on whether there is a will, a note, neither, or both and exactly what they say plus what the bankruptcy code says. This is why families end up in inheritance litigation: documents are missing or inconsistent or badly drafted.
In the specific hypothetical presented by the OP, any sensible logic gets you to the equitable result because the full amount of Mike’s debt could be covered. But in more complex situations, we must be much more careful in our analysis. As a banker, I got dragged into inheritance litigation as well as bankruptcy cases. Things can turn on a single word.
Steven G
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600k - 400k + 216k = 416k
That calculation went right past me.
600k received from mother as a loan.
Repayment of only 400k because 200k ”was his.”
(400k + 450k)/3 = 850k/3 [imath]\approx[/imath] 216k distributed as share.
600k - 400k + 216k versus 216k for the other siblings. They will not be content.
Cash flow analysis is about doing sums of transactions that involve transfers of a medium of exchange and ignoring monetary characterizations of any transaction that does not involve a transfer of a medium of exchange. To put it crassly, follow the money.
I know most academics think all business can be done by monkeys, but, in some cases, they need to be rather clever simians. Simians of course aren’t really human. That is why bankers and lawyers disguise themselves by wearing suits. You can’t see their tails under a suit.
True story. I was in a bar one night and talking to an attractive woman. This giant in a leather jacket approached me and asked “Why do you suits think you can hit on other men’s wives“? I responded with “Do you want to swap clothes,” took off my suit jacket, and offered it to him. So we swapped jackets. His came down to my thighs, but what almost bowled me over was the weight of the pistols in his jacket.
Repayment of only 400k because 200k ”was his.”
(400k + 450k)/3 = 850k/3 [imath]\approx[/imath] 216k distributed as share.
600k - 400k + 216k versus 216k for the other siblings. They will not be content.
Cash flow analysis is about doing sums of transactions that involve transfers of a medium of exchange and ignoring monetary characterizations of any transaction that does not involve a transfer of a medium of exchange. To put it crassly, follow the money.
I know most academics think all business can be done by monkeys, but, in some cases, they need to be rather clever simians. Simians of course aren’t really human. That is why bankers and lawyers disguise themselves by wearing suits. You can’t see their tails under a suit.
True story. I was in a bar one night and talking to an attractive woman. This giant in a leather jacket approached me and asked “Why do you suits think you can hit on other men’s wives“? I responded with “Do you want to swap clothes,” took off my suit jacket, and offered it to him. So we swapped jackets. His came down to my thighs, but what almost bowled me over was the weight of the pistols in his jacket.