Should you divide your Trust or Will equally between your children, or not?
How a Will Treating Children Differently Can Still Be Fair
CHILDREN crave equal attention from their parents. So when it comes to inheritance, which can seem like a final accounting of that love, anything but an equal split can be tough to grasp.
But is there ever a time when inheritance should be uneven? And if so, can uneven still be fair?
The answer to both questions is yes. But how parents leave inheritances that are unequal but fair, or at least understandable, to their children and how those children deal with it can be challenging and may require some difficult and open conversations.
“When you think about how parents treat children, they don’t treat each child equally,” said Suzanne L. Shier, chief wealth planning and tax strategist at Northern Trust. “They try to treat them fairly and equitably.”
But, “unequal can be hard and challenging,” she said. “It has to be thoughtful.”
Consider this situation, from a reader who asked that her name be withheld to preserve family harmony. She’s the middle of three children, with over 15 years separating the oldest and the youngest.
She said she worried that decisions she made in life might end up getting her disinherited or at least receiving an inheritance radically unequal from her siblings’.
What did she do? She got a good job at a technology company, met a man who had worked there longer, married him and had a baby.
Through marriage, her financial life has improved markedly, even though she signed a prenuptial agreement that separated the assets her husband had before they married. But her family doesn’t know about the agreement. They just see their multimillion-dollar home and think she’s secure for life.
“My mom made some comment to me that we need to know what your financial situation is so we can make a decision to divide the estate,” she said. “I said I didn’t think it should matter. Then, I went to my dad and said, ‘Mom has given me indication that she’s going to divvy things up differently.’ Then, the whole thing dropped.”
More recently, her older sibling said she should prepare herself to receive less since she and her husband were so much better off.
“Just because I married someone with money doesn’t mean I should get cut out,” the reader said. “My husband’s money isn’t my money. I can’t spend it the way an inheritance could be spent.”
And while she is doing particularly well, both of her siblings live comfortably.
Jonathan S. Forster, a partner at the law firm Weinstock Manion in Los Angeles, said the reader’s feelings were not uncommon. But neither is the way her mother has thought through the situation.
He recently suggested a client talk to her two children about her plan to leave everything to her daughter, a teacher, and nothing to her son, a successful doctor. While she loved both children equally, she told him, she reasoned that her daughter needed the money more.
“She came back two weeks later very upset,” Mr. Forster said. “Her son said, ‘I’ve done everything you told me to do. I got into a good school, became a doctor and now you’ve disinherited me?’ She ended up not disinheriting her son but left more to her daughter.”
More important, she talked to them about the situation. “The schoolteacher was grateful because she was getting a greater share and she needs it,” he said. “But she doesn’t want this to impact her relationship with her brother.”
Lawyers and advisers said that in most cases where no malice or lack of love is intended, a conversation can solve a lot of the problems.
But there are plenty of instances when uneven inheritance happens by accident or on purpose and nothing has been said ahead of time.
Leanna Johannes, vice president and senior wealth strategist at PNC Wealth Management, said bad planning and a misdirected desire to avoid having the will sent through the probate process could lead to one child receiving more than the others.
Parents, for example, could name a child the beneficiary of a retirement account or insurance policy or have a bank account set up so it would be payable on death to a child. Even if the will said that all assets should be split evenly among their children, the retirement account, insurance policy and bank account would pass directly to whoever was named and not be considered part of the estate being divided up.
“When you explain it to them, they’ll say, ‘That’s not how I thought it would go,'” she said.
And if the mistaken planning isn’t caught ahead of time, fixing it afterward depends on good will among the children and, even then, requires planning. If the child who received more gave a portion of the inheritance to siblings, that could incur a gift tax.
A better way, Ms. Johannes said, would be for the child with the greater share to disclaim part of it to make the inheritance equal for his or her siblings. But that child would be under no obligation to do that.
Leaving money unequally on purpose requires more foresight. A usual case where siblings agree is if one child has special needs, whether physical or mental, that require continuous funding.
Another instance is when there is a family business, and one child is working in or running that business. There are ways to protect the other children, though.
Ms. Johannes said she worked with a family that had a business deemed to be potentially worth $6 million. One child was running it, so the parents bought an insurance policy to leave an equivalent amount to their other two children.
In other cases, not all children are good with financial decision-making, so their share might be left in trust. While those children still get an equal amount, they just don’t get it outright. “It’s logical but difficult emotionally for children to be treated differently in inheritances,” Ms. Shier said.
Then there are the instances of children from multiple marriages. More money, for example, might be left to the younger children to get them to where the older ones are in life.
“It’s rough justice,” said William D. Zabel, a founding partner of the law firm Schulte Roth & Zabel. “The 30-year-old child went to Harvard and Yale Law School. Then they have a 10-year-old. How much do they favor him?”
In divorces, he said, the wife from the earlier marriage “wants to make sure that her child isn’t mistreated by later children.”
And if the last spouse is similar in age or younger than the oldest children, a poorly drafted estate plan could end up disinheriting the older children if the current spouse gets all the money and outlives them.
All these problems can be minimized, if not fixed, with a conversation. “My rule is the sooner the better and tell them as much as they need to understand what the family wealth is about,” Mr. Zabel said.
The downsides of not getting this right are huge. “Our litigation group is thriving because kids are feeling more and more entitled,” Mr. Forster said. “There are horror stories of the parents sliding down the scale of incapacity and the child takes them into the lawyer to have their trust or will revised. There is this significant question of undue influence.”
For the most part, though, parents can’t go wrong with treating their children equally, though Ms. Shier says she makes sure parents understand what that means.
“When parents say, ‘We want to treat our children equally,’ we say, ‘Do you want to treat them equally or fairly?'” she said. “It’s not a cop-out to leave it equally. That’s a logical approach.”
As for the reader who raised the question, she has started to imagine how she would feel if the family murmurings of an uneven split prove true.
“It would just seem so unfair on the face of it,” she said. “If you think of how children feel over the course of a lifetime, there are so many thing that kids keep score on. Who got this quality time? This car trip? There are so many imbalances. You think it would just get divided equally in the end.”
Fair point but, of course, the choice to be even or not on inheritances is entirely up to parents who won’t be around to deal with the consequences of what was left unsaid.