When it comes to leaving money to the kids, some parents struggle to reconcile “equal” with “fair.” An equal inheritance treats each child the same, regardless of life situation or special circumstances. On the other hand, sometimes an unequal distribution can seem like the fairest thing to do, given a child’s age, financial wherewithal, or previous track record.
To avoid unpleasant surprises and contentious family squabbles, be transparent about your plans and talk with your children ahead of time. That helps children understand your point of view and gives them an opportunity to share concerns or life issues you may not be aware of. Imagine, for example, that you intend to leave more to your daughter, the social worker, and less to your son, the small business owner. Disclosing this plan could encourage your proud son to reveal that business is declining and the operation has far less value than you thought.
Having these difficult conversations ahead of time allows you to adjust for such misunderstandings, before it’s too late. You may find that your children are sympathetic and accepting of unequal distributions. Alternately, you may change your mind if one child’s sense of hurt and injustice threatens to divide family relationships.
Here’s a partial list of reasons you may choose to allocate an inheritance unequally:
- A child has special needs and requires long-term financial help.
- A child struggles with addiction, legal issues, or chronic financial mismanagement (an option here would be to put this child’s gift into a trust to control how he or she accesses it).
- A child earns more or has a significantly higher standard of living than his or her siblings.
- A child received sizable financial gifs while you were still alive.
- A child is younger and will need support for college and other coming-of-age expenses which you already provided to the elder children.
- A child has died and you do not wish to distribute your assets to his or her heirs.
- A child provided caregiving support to you in your old age while others did not.
Documenting your rationale
In addition to telling your children why you plan to leave an unequal gift, consider providing a written explanation of your decision that can be attached to your trust or will. Such a letter communicates facts and feelings that are not otherwise included in estate planning documents and may deter an unhappy heir from contesting your will. Consult your attorney about any estate planning letters you intend to leave to ensure you don’t create any confusion in your plans.
Talk to your estate planner and be sure you understand the implications of naming certain children as a beneficiary on a retirement account or life insurance policy. In such cases, those assets would pass to the named child directly and would be excluded from your estate, meaning those assets won’t get divvied up among your heirs.
Even if your child recognizes this was a mistake and wants to redistribute the funds, it can be a costly and difficult issue to fix. Regifting assets to their siblings could trigger gift taxes. Alternately, the child could disclaim part of the inheritance, but that is best done with legal counsel and a full understanding of potential implications.
If you’re convinced that an unequal distribution will create a serious sense of unhappiness, consider alternative ways to support a child or otherwise “even things out.” You might consider making annual gifts to a child while you are still alive. In 2018, you can give $15,000 to any number of individuals without having to pay a gift tax. In fact, you and your spouse may give $15,000 each to the same person without triggering gift taxes.
Another option is to compensate a child for assistance he or she provides you, or seek out other ways to support the family, such as contributions to a grandchild’s college fund.
Another way to assuage a child’s hurt feelings could be to give one child more money while gifting the other one with meaningful family heirlooms or other assets, such as a vacation property or a collector car.
Fewer surprises, less discord
Money issues have significant potential to create conflict, even among the most harmonious families. Clear communication is critical to helping maintain relationships and goodwill among those you leave behind. An explanation of why you made the decision you did can alleviate uncomfortable questions and reduce (or hopefully eliminate) any lingering bad feelings.
Reference: Legal Matters (2018) “Communicate with your kids before leaving unequal assets.”
If you would like to discuss setting up your estate plan with an experienced attorney at Simmons & Schiavo, LLP, call us today (781) 397-1700 or schedule a consultation here.