By Philip Kavesh, Attorney
“That’s not fair!” What parent of youngsters hasn’t heard that countless times? It’s a complaint that doesn’t necessarily vanish when children are adults. In fact, depending on how they feel they’ve been treated in your estate plan, your kids may be complaining about unfairness even after you are gone, to the detriment of their relationship with one another.
Is equal always fair? How can you avoid being perceived as playing favorites in your estate plan? The most obvious approach is to split everything equally. That’s often what’s done, without much further thought. But suppose your children’s circumstances are vastly different? In those cases, treating your children “equally” in your estate plan may not necessarily be the same as treating them “fairly.” Here are just a few situations when dividing everything equally may not be the best solution:
Scenario 1: One child is far more successful financially. Example: Child A is doing exceptionally well on Wall Street as an investment banker. Child B, just as hardworking, has made teaching high school English his or her life’s work. If you split your assets “equally,” B may feel slighted, and miss out on money he or she could legitimately put to good use such as for buying a home, putting children through college or saving for retirement. If you give Child A less, he or she may feel rejected and punished for being successful, despite the fact that he or she does not need the money. What’s “fair”?
Scenario 2: Child A is fiscally responsible. Child B makes bad financial decisions and seems always to be in dire financial straits. B may be immature, or may have a drug or mental health issue. You know that if A gets his inheritance as a lump sum up front, he or she will manage it wisely. But you hesitate to give B his or her inheritance all at once, and would prefer to put it in trust so that a third party trustee has oversight over how it is used. Will B understand why he or she is being treated differently? Maybe. But will he or she resent that A is getting his or her inheritance up front? Quite possibly. What’s “fair”?
Scenario 3: Child A is healthy, but Child B has a disability or lifelong medical issues. Depending on B’s circumstances, you may want to leave him or her more than you leave A. If you expect B will need federal benefits in the future, you may want to put B’s funds in a special needs trust. Despite the unequal treatment, the need for this arrangement is likely to be understood by both children. But that does not eliminate the issue of who gets to manage child B’s trust. Will your healthy child want to be his or her brother’s or sister’s keeper, or consider it a burden? Will it cause friction between them? What’s the best way to handle this “fairly”?
Scenario 4: Child A has worked since his or her teenage years, put himself or herself through school and never asked you for a penny. On the other hand, you gave Child B $200,000 for college tuition and room and board, and you recently gave B $50,000 as a down payment for a home. Splitting your assets equally at death between the two of them might be great for B, but is it really “fair”? Instead of equal distributions, you may want to consider the gifts you’ve made to B over the years as a kind of early inheritance, or a debt, and deduct that amount from what you are leaving B when you pass away. But how does the type of assets you own, and how much is “liquid” or not, affect this decision? What kind of formula is not only “fair” but workable?
Scenario 5: For a number of years Child A has been caring for you, taking you to your doctors’ appointments, checking up on you by phone and in person, helping you with your paperwork and with other everyday matters. Child B is no busier than A and lives just as close, but rarely lifts a finger to help. You don’t know if A resents B, but you wouldn’t be surprised if he or she does. Is an equal division of your assets between the two really fair, you wonder? How will this play out between the two if you reward A for his or her efforts by giving him more?
Scenario 6: You own a home and maybe a rental property. Child A lives in your home and Child B lives in an apartment at your rental building (and may also help with the building management). Should one child get the home and the other the rental building? Is that “fair” when one property may be worth more than the other or have more appreciation potential? Is that “fair” if the rental building has a healthy cash flow income? Should you equalize between them with other liquid assets of your estate? Is a “fair” equalization formula even possible? Should the one child getting a larger share of your estate have to buy out the other; upon what terms and for what price? What’s both “fair” and workable?
What are your alternatives? When your children were little, all you had to do was split the cookie equally, and a problem was solved. It’s not that easy now.
How to distribute assets to children with different needs and histories while trying to be even-handed can be a vexing problem. Some parents, unable to find a “perfect” solution, will continuously delay making a plan or never create one, letting the State of California’s intestacy laws determine who gets what. That will result in each child getting an equal share, which doesn’t solve the potential problem of one child feeling resentful in relation to siblings.
This Is Where Our Vast Years of Experience As Professional
“Counselors” Can Help
Most people think our job, as estate planning attorneys, is to simply write down what you want to happen after you’re gone. That certainly is an important part of what we do.
But, often times, people come in and are not sure what’s the “fair” or “best” way to treat their children or other beneficiaries. When we meet with a client and start to dig more deeply into your family history and the skills, needs and circumstances of each of your beneficiaries, we often identify issues not previously thought about, that should be addressed.
When I got out of law school (some 42 years ago!), attorneys were called “Counselors at Law”. Even though you may not hear that term any more, now more than ever our role is to help guide you through these kinds of challenging, difficult estate planning discussions (but, of course, the final decisions are always up to you!).
Our law firm has handled over 4,000 estate plan administrations after people have passed and we apply that extensive knowledge of what we’ve seen work best when plans are carried out and ultimately tested. Theoretical solutions aren’t always the most practical; and complex solutions often cause more contests and disagreements over exactly how they should work.
Our principal job is to help you formulate a reasonable plan that you can live with (and die in peace with), and that you and your kids are likely to find “fair.” Obviously, there is no one solution suitable for every family. We will sit down with you to explore in detail your finances, family dynamics, family history, individual beneficiary situations and your goals.
One Late Note:
What’s “Fair” Needs to Be Periodically Reviewed
Estate planning is not a one-shot and it’s done forever deal. Lots of things change over time, which is why we urge our clients to come in to review their plan about every 3 years. Even if the division of your assets and what you consider is “fair” hasn’t changed, the more times our file notes reflect that you’ve reviewed your plan and decided it was okay, the better protection you and your loved ones have against any “contest” or fight by a beneficiary who feels he or she wasn’t treated fairly or was “promised” something different than what he or she got. We’ve also found that a note in your own handwriting, as to why you may give beneficiaries unequal shares, done in our office when no beneficiary can claim you were “unduly influenced” by another, can go a long way towards fostering a good relationship among your children after your passing – – and could potentially even prevent a lawsuit against your estate from an angry child who feels “That’s not fair!”
If you haven’t been in for a review of your plan for the past 3 years, call us to schedule a free attorney meeting.
A special thanks to my estate planning colleague, attorney Joseph S. Karp, who practices in South Florida, for his substantial contribution to this article.