Growing up the youngest of three siblings, I had many opportunities to develop an early understanding of what was equal and fair, and most certainly for what was unfair. One such opportunity presented itself when I was around age 8. After a particularly long day of helping my dad with yardwork, my siblings and I were excited to be treated with ice cream for dessert. My brother and sister had spent most of the afternoon fighting, bickering, and generally not working very hard. On the other hand, on this particular day, I stayed out of the fray and simply helped get the job done.
When it came to dishing out the ice cream, my dad gave my brother and sister their usual scoop each. When it came to mine, he simply asked, “how much?” indicating I could have several scoops if I so desired. It was my reward for the hard work that afternoon.
Fair? I think so. Equal? Most definitely not.
When it comes to deciding how your heirs should receive assets from your estate, it is not as simple as deciding who worked harder that day and there are often more “desserts” to choose from than just ice cream (of course when I say desserts and ice cream in this case, I mean assets and perhaps cash).
Equality
Let’s start with what seems to be the easiest solution for estate planning: equality. This solution—providing equal value to each child—is the most common in estate planning and is the default solution by most states’ laws when a person dies without a will and has surviving children. At a surface level, it reduces family discord and can promote healthy family relationships. Where there may be frayed relationships involved, it can help to avoid will contests or disputes and help heal old wounds. While splitting your assets equally among your heirs appears to be simple and straightforward, there are pitfalls to consider.
Tangible Personal Property: Commonly, your tangible personal property will be divided “in equal shares” to the named heirs inside your estate documents. Your executor can obtain appraisals on valuable items and attempt to divide the property among heirs as equally as possible or sell assets and divide the cash. But you can’t assign a value to the emotional attachment heirs may have to certain items. If you anticipate arguments among your heirs over your personal property, consider allowing them to make requests for certain items during your lifetime. Capture those requests in a memo attached to your will so those requests can be honored at your death. Your remaining personal property can be split as equally as possible and agreed upon by the heirs or sold by the executor so the cash proceeds can be split equally.
Responsibilities: Naming one of your heirs as the executor of your estate or trustee of trusts created at your death can seem logical and may be the best decision but be sure to tell your heirs the reasons for your choice to avoid any appearance of favoritism. In our experience, the individual appointed to serve as executor or trustee often does not feel it was a gesture of favoritism to be appointed to take on this responsibility.
Example: Joe’s mother recently passed. He is named the sole executor and has two siblings. After nearly completing her estate settlement he declared, “Being executor has been a lot of work! I should have been paid extra for this!” Many heirs feel this additional burden when being named sole executor of their parents’ estate.
If your estate includes a family business or directly held real estate that requires ongoing management, carefully consider who you’ll name as the controlling or responsible party(ies) for these assets as this can impose hidden inequalities in your estate planning as well. Your daughter may be best suited to run the family business and may be the only one interested, but you may want to consider leaving cash or other assets of equivalent value to the other heirs who are not receiving the business.
Unequal Family Lines: Do your children each have the same number of children? If you provide for your grandchildren in your estate, will there be inequality if one child had four children and the other had one? Or none?
Example: Grandma Jean has seven heirs: four children and three grandchildren from one child. Here are just a few of the possible options she might choose from.
- Option 1: Grandma Jean decides to benefit all heirs equally.
- Option 2: She chooses to give to her children individually and benefit all grandchildren collectively through a Pot Trust (read on for more).
- Option 3: Grandma Jean chooses only to leave assets to her children, allowing them to decide how to benefit the grandchildren.
- Option 4: She divides her assets into percentages: 80% for children and 20% for the children of one child (her only grandchildren).
Fairness
To address the hidden inequalities in equal shares, consider implementing elements of fairness in the provisions of your estate plan. Here are some examples:
Sell Illiquid Assets: If one, some, or all of your heirs don’t have the desire to be in the family business, manage the family real estate, or otherwise inherit assets that are difficult to divide, sell the assets and divide the proceeds equally.
Equalize with Different Assets: If one heir receives an asset that other heirs don’t benefit from—a family business, for example—you might make their inheritances balance with life insurance or other beneficiary-designated assets to the remaining heirs.
Equalize with Future Inheritance: If you’ve given to one child during her lifetime but not to your other children, you may want to consider equalizing the inheritance by leaving a larger share to your other heirs in your estate.
Pot Trusts: A pot trust is a single trust for the benefit of multiple beneficiaries in the same generation without preferential distribution rights to any beneficiary. While a pot trust generally is not ideal as a long-term solution, it can provide needed short-term flexibility to provide for unequal distributions to beneficiaries based on need. This is a common structure for providing for education expenses to grandchildren until the youngest reaches a specified age.
Disclaimer Provisions: If you’re considering unequal provisions to heirs due to differences in their personal balance sheets, you can introduce disclaimer provisions in your estate documents instead. A disclaimer is a legal refusal to accept all or a portion of an inheritance. Rather than disinherit an heir who “doesn’t need the money,” including a disclaimer provision will empower the wealthier heir to make his own decision regarding whether to accept or disclaim his share.
Example: Anne’s daughter is a teacher in the public school system. She has had a solid career with a fairly predictable trajectory for her salary. Anne’s son is a venture capitalist in technology. He has been quite successful financially and all signs point to his having a significant net worth. Rather than assume her son won’t need (or want) her inheritance, Anne includes disclaimer language in her estate documents that gives her son (and daughter) the flexibility to disclaim all or a portion of their inheritance depending on their respective needs. The provisions in Anne’s estate documents ensure that any portion disclaimed is still available if desired, to his children in trust.
Powers of Appointment: Introducing the ability for an heir or spouse to redirect assets from the original terms of the agreement can provide flexibility to adjust inheritances in trust.
Example: Mary’s existing estate passes assets to her three children in equal separate trusts. Her documents also state that if a child predeceases her, the deceased child’s share will pass to the child’s children in trust instead. Mary included a provision in the trusts for the children that grants each child the power to appoint assets in their respective trusts to any of Mary’s descendants or to charity. One of Mary’s children, Dave, does not have any children. Without exercising his power to redirect assets, his share of Mary’s inheritance in trust would pass to his siblings or his nieces and nephews (Mary’s descendants) at his death. Alternatively, by exercising his power to appoint, Dave can choose to redirect his share to his favorite charity at his death.
Fair Not Equal
Despite the common idea that an inheritance should be split equally among heirs, there may be a good reason for unequal treatment of beneficiaries in your estate plan. These might include the desire to provide for a child with greater care needs, the need for repayment to or from a child for lifetime expenses, or a familial relationship (stepchildren, for example) that warrants treating heirs differently. Introducing inequality in your estate plans may be a perfectly fair way to solve for these unique but common circumstances.
If you make the decision to treat heirs unequally, you will want to carefully consider how this is accomplished. Lifetime gifting is one solution that can be less obvious to your heirs than through your estate documents. For example, during your lifetime, you might pay additional support or healthcare expenses for a child with additional needs. Your son or daughter with more children may benefit from your direct payment of tuition, additional contributions to 529 Plans, or more annual gifts. Tangible personal property like family heirlooms can be passed along during your lifetime to prevent disagreements and draw less attention to the gifts being made.
Choosing to manage the inequality through your estate planning documents can still be accomplished discreetly, if desired. If privacy is important, we typically do not recommend including the provisions that direct the division of your estate among your beneficiaries in your will. A will must be submitted through the probate process and is public to anyone with interest, possibly including a disinherited heir or an heir who receives less than an equal share of your estate. As a solution, we recommend working with legal counsel to consider the use of a trust to ensure the desired privacy.
Example: Business owner Larry has two sons, John and Bill. John participates in the business while Bill is not involved. Larry wants to be sure that at his death, 100% of the ownership of the business will pass to his son John. Larry therefore places the business into a trust, the sole beneficiary of which is his son John. The rest of Larry’s estate will pass through his will, providing equal shares of the remaining estate to both John and Bill.
Finally, and perhaps simplest, you can update the beneficiary designations on your financial accounts and life insurance policies to unequally benefit your heirs. Use caution when updating beneficiaries to make note and update them again should your desires change in the future.
Communicating Your Plan
Unequal inheritances can often cause tension and conflict among family members, so it is important to communicate clearly with your heirs about the reasons for your decision. Have these conversations early so your heirs have time to process the information and ask questions. Be clear about the reasons for your decision and provide examples to help them understand. Acknowledge that an unequal inheritance may be difficult for some heirs to accept and express your love and appreciation for each of them. Make sure your heirs understand that your decision is not a reflection of your love for them, but rather a reflection of your unique circumstances and values.
We often recommend a side letter or a letter of intent to offer your heirs a chance to read, in your own words, why you chose to distribute your assets in the manner you did, and how you desire them to use the assets. In the case of unequal distributions, you may also want to include a “letter of wishes” or letter of instruction for the trustees and beneficiaries of trusts.
In addition to “open after my death” letters, you can take additional steps during your lifetime to ensure that all heirs have the same understanding of your wishes and the plans you’ve made. Consider hosting a family meeting with all parties included to share the same message to all heirs at the same time. This allows everyone to ask questions together and to hear the same answers to those questions. If you anticipate significant tension or conflict among your heirs, it may be helpful to enlist the help of a skilled professional such as a mediator or financial planner to facilitate the conversation. A facilitator can guide the discussion through potential emotional landmines and navigate any blame-shifting or feelings of victimization. Alternatively, it may be appropriate for you to have private conversations with individual heirs to explain your decision and reasoning. Be thoughtful, not only about the method but also about the timing of your communication. Perhaps bringing up the topic right after Thanksgiving dinner is not the best time for the information to be received. Ultimately, you know your heirs best and can determine the best course of action. Overlooking the opportunity to clearly communicate could jeopardize your best-laid plans; open and honest conversation can go a long way in avoiding misunderstandings and conflicts down the line.
As always, we recommend that you work closely with your professional advisors to determine the best path forward based on your individual circumstances and the types of assets you have to distribute. Your advisors at Bragg Financial can be a great resource as you embark on this effort. Please let us know if you would like to discuss the ideas included in this article.
This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.
Artificial Intelligence: 2nd Quarter 2023 Commentary
June 30, 2023Money Matters After the Wedding
July 25, 2023Growing up the youngest of three siblings, I had many opportunities to develop an early understanding of what was equal and fair, and most certainly for what was unfair. One such opportunity presented itself when I was around age 8. After a particularly long day of helping my dad with yardwork, my siblings and I were excited to be treated with ice cream for dessert. My brother and sister had spent most of the afternoon fighting, bickering, and generally not working very hard. On the other hand, on this particular day, I stayed out of the fray and simply helped get the job done.
When it came to dishing out the ice cream, my dad gave my brother and sister their usual scoop each. When it came to mine, he simply asked, “how much?” indicating I could have several scoops if I so desired. It was my reward for the hard work that afternoon.
Fair? I think so. Equal? Most definitely not.
When it comes to deciding how your heirs should receive assets from your estate, it is not as simple as deciding who worked harder that day and there are often more “desserts” to choose from than just ice cream (of course when I say desserts and ice cream in this case, I mean assets and perhaps cash).
Equality
Let’s start with what seems to be the easiest solution for estate planning: equality. This solution—providing equal value to each child—is the most common in estate planning and is the default solution by most states’ laws when a person dies without a will and has surviving children. At a surface level, it reduces family discord and can promote healthy family relationships. Where there may be frayed relationships involved, it can help to avoid will contests or disputes and help heal old wounds. While splitting your assets equally among your heirs appears to be simple and straightforward, there are pitfalls to consider.
Tangible Personal Property: Commonly, your tangible personal property will be divided “in equal shares” to the named heirs inside your estate documents. Your executor can obtain appraisals on valuable items and attempt to divide the property among heirs as equally as possible or sell assets and divide the cash. But you can’t assign a value to the emotional attachment heirs may have to certain items. If you anticipate arguments among your heirs over your personal property, consider allowing them to make requests for certain items during your lifetime. Capture those requests in a memo attached to your will so those requests can be honored at your death. Your remaining personal property can be split as equally as possible and agreed upon by the heirs or sold by the executor so the cash proceeds can be split equally.
Responsibilities: Naming one of your heirs as the executor of your estate or trustee of trusts created at your death can seem logical and may be the best decision but be sure to tell your heirs the reasons for your choice to avoid any appearance of favoritism. In our experience, the individual appointed to serve as executor or trustee often does not feel it was a gesture of favoritism to be appointed to take on this responsibility.
Example: Joe’s mother recently passed. He is named the sole executor and has two siblings. After nearly completing her estate settlement he declared, “Being executor has been a lot of work! I should have been paid extra for this!” Many heirs feel this additional burden when being named sole executor of their parents’ estate.
If your estate includes a family business or directly held real estate that requires ongoing management, carefully consider who you’ll name as the controlling or responsible party(ies) for these assets as this can impose hidden inequalities in your estate planning as well. Your daughter may be best suited to run the family business and may be the only one interested, but you may want to consider leaving cash or other assets of equivalent value to the other heirs who are not receiving the business.
Unequal Family Lines: Do your children each have the same number of children? If you provide for your grandchildren in your estate, will there be inequality if one child had four children and the other had one? Or none?
Example: Grandma Jean has seven heirs: four children and three grandchildren from one child. Here are just a few of the possible options she might choose from.
Fairness
To address the hidden inequalities in equal shares, consider implementing elements of fairness in the provisions of your estate plan. Here are some examples:
Sell Illiquid Assets: If one, some, or all of your heirs don’t have the desire to be in the family business, manage the family real estate, or otherwise inherit assets that are difficult to divide, sell the assets and divide the proceeds equally.
Equalize with Different Assets: If one heir receives an asset that other heirs don’t benefit from—a family business, for example—you might make their inheritances balance with life insurance or other beneficiary-designated assets to the remaining heirs.
Equalize with Future Inheritance: If you’ve given to one child during her lifetime but not to your other children, you may want to consider equalizing the inheritance by leaving a larger share to your other heirs in your estate.
Pot Trusts: A pot trust is a single trust for the benefit of multiple beneficiaries in the same generation without preferential distribution rights to any beneficiary. While a pot trust generally is not ideal as a long-term solution, it can provide needed short-term flexibility to provide for unequal distributions to beneficiaries based on need. This is a common structure for providing for education expenses to grandchildren until the youngest reaches a specified age.
Disclaimer Provisions: If you’re considering unequal provisions to heirs due to differences in their personal balance sheets, you can introduce disclaimer provisions in your estate documents instead. A disclaimer is a legal refusal to accept all or a portion of an inheritance. Rather than disinherit an heir who “doesn’t need the money,” including a disclaimer provision will empower the wealthier heir to make his own decision regarding whether to accept or disclaim his share.
Example: Anne’s daughter is a teacher in the public school system. She has had a solid career with a fairly predictable trajectory for her salary. Anne’s son is a venture capitalist in technology. He has been quite successful financially and all signs point to his having a significant net worth. Rather than assume her son won’t need (or want) her inheritance, Anne includes disclaimer language in her estate documents that gives her son (and daughter) the flexibility to disclaim all or a portion of their inheritance depending on their respective needs. The provisions in Anne’s estate documents ensure that any portion disclaimed is still available if desired, to his children in trust.
Powers of Appointment: Introducing the ability for an heir or spouse to redirect assets from the original terms of the agreement can provide flexibility to adjust inheritances in trust.
Example: Mary’s existing estate passes assets to her three children in equal separate trusts. Her documents also state that if a child predeceases her, the deceased child’s share will pass to the child’s children in trust instead. Mary included a provision in the trusts for the children that grants each child the power to appoint assets in their respective trusts to any of Mary’s descendants or to charity. One of Mary’s children, Dave, does not have any children. Without exercising his power to redirect assets, his share of Mary’s inheritance in trust would pass to his siblings or his nieces and nephews (Mary’s descendants) at his death. Alternatively, by exercising his power to appoint, Dave can choose to redirect his share to his favorite charity at his death.
Fair Not Equal
Despite the common idea that an inheritance should be split equally among heirs, there may be a good reason for unequal treatment of beneficiaries in your estate plan. These might include the desire to provide for a child with greater care needs, the need for repayment to or from a child for lifetime expenses, or a familial relationship (stepchildren, for example) that warrants treating heirs differently. Introducing inequality in your estate plans may be a perfectly fair way to solve for these unique but common circumstances.
If you make the decision to treat heirs unequally, you will want to carefully consider how this is accomplished. Lifetime gifting is one solution that can be less obvious to your heirs than through your estate documents. For example, during your lifetime, you might pay additional support or healthcare expenses for a child with additional needs. Your son or daughter with more children may benefit from your direct payment of tuition, additional contributions to 529 Plans, or more annual gifts. Tangible personal property like family heirlooms can be passed along during your lifetime to prevent disagreements and draw less attention to the gifts being made.
Choosing to manage the inequality through your estate planning documents can still be accomplished discreetly, if desired. If privacy is important, we typically do not recommend including the provisions that direct the division of your estate among your beneficiaries in your will. A will must be submitted through the probate process and is public to anyone with interest, possibly including a disinherited heir or an heir who receives less than an equal share of your estate. As a solution, we recommend working with legal counsel to consider the use of a trust to ensure the desired privacy.
Example: Business owner Larry has two sons, John and Bill. John participates in the business while Bill is not involved. Larry wants to be sure that at his death, 100% of the ownership of the business will pass to his son John. Larry therefore places the business into a trust, the sole beneficiary of which is his son John. The rest of Larry’s estate will pass through his will, providing equal shares of the remaining estate to both John and Bill.
Finally, and perhaps simplest, you can update the beneficiary designations on your financial accounts and life insurance policies to unequally benefit your heirs. Use caution when updating beneficiaries to make note and update them again should your desires change in the future.
Communicating Your Plan
Unequal inheritances can often cause tension and conflict among family members, so it is important to communicate clearly with your heirs about the reasons for your decision. Have these conversations early so your heirs have time to process the information and ask questions. Be clear about the reasons for your decision and provide examples to help them understand. Acknowledge that an unequal inheritance may be difficult for some heirs to accept and express your love and appreciation for each of them. Make sure your heirs understand that your decision is not a reflection of your love for them, but rather a reflection of your unique circumstances and values.
We often recommend a side letter or a letter of intent to offer your heirs a chance to read, in your own words, why you chose to distribute your assets in the manner you did, and how you desire them to use the assets. In the case of unequal distributions, you may also want to include a “letter of wishes” or letter of instruction for the trustees and beneficiaries of trusts.
In addition to “open after my death” letters, you can take additional steps during your lifetime to ensure that all heirs have the same understanding of your wishes and the plans you’ve made. Consider hosting a family meeting with all parties included to share the same message to all heirs at the same time. This allows everyone to ask questions together and to hear the same answers to those questions. If you anticipate significant tension or conflict among your heirs, it may be helpful to enlist the help of a skilled professional such as a mediator or financial planner to facilitate the conversation. A facilitator can guide the discussion through potential emotional landmines and navigate any blame-shifting or feelings of victimization. Alternatively, it may be appropriate for you to have private conversations with individual heirs to explain your decision and reasoning. Be thoughtful, not only about the method but also about the timing of your communication. Perhaps bringing up the topic right after Thanksgiving dinner is not the best time for the information to be received. Ultimately, you know your heirs best and can determine the best course of action. Overlooking the opportunity to clearly communicate could jeopardize your best-laid plans; open and honest conversation can go a long way in avoiding misunderstandings and conflicts down the line.
As always, we recommend that you work closely with your professional advisors to determine the best path forward based on your individual circumstances and the types of assets you have to distribute. Your advisors at Bragg Financial can be a great resource as you embark on this effort. Please let us know if you would like to discuss the ideas included in this article.
This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.
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