This article was originally published in the Summer 2001 issue of the Expert Witness.
In Brooks v. Stefura, the Court of Appeal stated that “accelerated inheritances” should be deducted from each plaintiff’s dependency award. The Court did not, however, state clearly what it meant by “accelerated inheritances.” In this article, I offer a number of observations that may cast some light on this issue.
First, note that the “gain” in the present is to be reduced by the loss of the same amount in the future, at the deceased’s without-accident expected age of death. When the asset inherited “today” is physical in nature – for example, a house or piece of land – one must be careful to take into account the probability that the value of that asset would have increased significantly before the deceased’s natural death. The greater would this rate of increase have been, the lesser will the “gain” be from having inherited “early.”
For example, assume that a child inherits a house with a value of $100,000 (after payment of outstanding debts) today instead of at his mother’s natural date of death 20 years from now. If the rate of inflation of house prices is 3 percent per year, the house would have been worth $180,000 at the mother’s date of death. Assuming a rate of interest of 6 percent, it would be necessary to invest $56,300 today to generate $180,000 20 years from now. Thus, receiving $100,000 today instead of $180,000 20 years from now yields a gain of $43,700.
If, however, the rate of inflation of house prices is 4 percent, the house would have been worth $219,000 20 years from now. At a rate of interest of 6 percent, that amount could be replaced by investing $68,300 today. In that case, the receipt of $100,000 today, instead of $219,000 20 years from now, provides a benefit to the survivor of only $31,700.
More importantly, when the asset that is inherited today is financial in nature – for example, stocks or bonds – there is no gain at all from early inheritance. For example, assume that the asset is a secure bond that pays 8 percent per year for the next 10 years. Assume also that the deceased had a 10-year life expectancy. It is unlikely that the heirs could sell the bond and invest it in a secure financial instrument that pays more than 8 percent. Hence, they have gained nothing by receiving ownership of the bond today rather than 10 years hence.
Second, the deduction of “accelerated inheritances” results in the dependants of spendthrifts receiving larger awards than will the dependants of frugal individuals, everything else being equal. For example, assume that two individuals both earn $50,000 per year after taxes and both own houses valued at $200,000 that they purchased 10 years ago. Individual A has been devoting $20,000 per year to the payment of his mortgage, whereas individual B has been devoting only $10,000. As a result, at the time of his death A has paid off $140,000 of his mortgage while B has paid off only $60,000. The decision of the Court of Appeal would result in a much larger deduction from A’s estate than from B’s.
Third, in most cases, the most important inheritance will be the equity in the family home, left to the surviving spouse. It is not clear, however, that receipt of this equity “accelerates” the benefits enjoyed by the survivor. Assume, for example, that the home in question is worth $200,000. In most cases, the surviving spouse would have owned half of the home. Thus, it is the deceased’s half of the house that, presumably, the survivor has “gained.” But if the deceased had lived, the survivor would have had the benefit of that half of the house. It is difficult to see, therefore, what it is that the survivor has “gained” and, therefore, why there should be some deduction of the “accelerated’ inheritance.
The leading doctrine in damage assessment is restitutio in integrum, restoration of the plaintiff to his or her “original position.” The original position of the survivor is that he or she enjoyed use of 100 percent of the family home and some percent (usually, approximately 70 percent) of the other spouse’s (after-tax) income. For the Court to rule that some portion of the equity in the home should be deducted from the survivor’s claim against the dependency on income is tantamount to a ruling that the survivor should not be returned to his or her original position.