What is Fair in Estate Planning?
Are Equal and Fair the Same Thing?
Difference Between Fair and Equal in Estate Planning
Hey there I’m Estate Planning Attorney Paul Rabalais. In this post I am going to analyze the similarities and differences between fair and equal when it comes to how you leave your estate to your heirs. So what leads me to produce this video is that over the years people will discuss their proposed estate distribution schedule and then they will ask me, “Paul, does that seem fair to you?” And that’s when I laugh…because I am not the one to determine what is fair when it comes to your estate planning decisions - only YOU can determine whether a purported estate distribution is fair. Now let’s start with this. For people with two or more children, there appears to be a rebuttable presumption that leaving the estate equally to children is the same as being fair to the children. But in this post I want to address where being unequal in the distributions to your children can be fair.
First of all, let’s get this straight - your heirs (or your children) do not have the right to dictate to you what is fair. You have no obligation to treat your children or your heirs equally when it comes to dividing up your estate when you pass away. You are the sole decisionmaker - well, perhaps with your spouse - when it comes to the “fair” way to leave your estate. When it comes to estate planning and how one distributes their wealth when they die, this clearly falls under the popular saying of “He who has the gold makes the rules”.
Here are seven areas where I’d like to let you know it is ok to do what feels right to you, regardless of what an attorney, a child, a friend, or even a spouse, might say:
Equal to Avoid Sibling Conflict
(1) To me, this is a tough one to admit, but some people tend to default to equal treatment due to the fear that unequal treatment may adversely affect sibling relationships. This first area - of treating children equally from an inheritance standpoint because you would not want the children “who deserve less” to be mad at the children “who deserve more” is a little controversial to me, but I mention it because many parents create their estate plan that way - they are trying to be sensitive to the siblings’ future relationships.
When Unequal Treatment can be Warranted
(2) Unequal treatment is often warranted in the following circumstances (a) one child is going through a bankruptcy and a creditor would swoop down and grab that child’s inheritance the moment they received it - the alternative would be to leave that child’s inheritance in a particular kind of trust, or informally, we see some parents leave the bankrupt children’s inheritance to other children to “protect” it for the bankrupt child; and (b) you have a child who is struggling financially because they gave up their career to care for you 24/7/365, while another child of yours is an independently wealth multimillionaire who never so much as gives you the time of day and can’t even, as they say “pick up the phone to call you on your birthday.”
Fairness in Estate Planning with Blended Families
(3) The blended family situation. Let’s say Phil had a child (Phil, Jr.) before he married Claire. And then Phil and Claire had three children together. How should the estate of Phil and Claire be divided? Claire might say, “I love Phil, Jr., like he’s one of my own. I support the concept of Phil and I, leaving everything we have four ways equally, even though Phil, Jr., is not my child. Or, they might like the concept of, after both Phil and Claire die, Phil’s portion of the couple’s assets being divided four ways, and Claire’s portion of the couple’s assets being divided three ways - but this takes some particular doing as part of the estate planning document creation process.
Lifetime Gifts to Children or Beneficiaries
(4) Parents can go either way with this one. This fourth area has to do with how parents leave their estate to their children when they either provided more, or made lifetime gifts, perhaps even significant gifts, to one child, while they did not do as much for the other children. On a personal level, my wife and I have five great kids. And with all of the private elementary and high schools we paid for, all the college expenses, and so far our oldest three have completed law school, along with all the travel expenses, sports teams, help with weddings, and everything else we paid for our kids, I am sure it has not been exactly equal for each child. But my wife and I have made the decision that we ain’t keeping track of all that. We do the best we can and at the end of the day, so long as our final check written to our funeral home doesn’t bounce, our kids will split evenly whatever we have left. But some parents set up their estate plan so that for example, if Child A received $75,000 more than Child B during the parents’ lifetime, Child A will receive $75,000 less than Child B when it comes to divvying up the estate. And who am I to judge that? Parents? It is 100% your call and you should do what you feel is right based on the circumstances that have led you to this point.
When Parents Make Loans to Children
(5) Similar to the previous area where we talked about whether lifetime gifts impact the estate distribution, we must also address whether loans you make to your children or heirs impact a purported equal distribution. Again, this is 100% your call. You can choose in your estate legal documents to forgive any or all indebtedness that is owed to you by your heirs, and then simply divide up what you have when you die equally. Or, you can choose to NOT forgive indebtedness, and if one of your heirs owes you on a loan when you die, that loan that is due to you is an asset of your estate that gets collected by your estate, typically by having that child or beneficiary receive less of an inheritance rather than actually formally paying back the loan to your estate. But it is important both in the area of lifetime gifts to heirs AND in unpaid loans to heirs, you need to address that and clearly communicate your intent so that, when you pass away, no one claims, “Well, this gifting and loan thing must have slipped our parent’s mind when they established their estate plan, and I know they would have wanted ___,” which can lead to conflict. So, it can really help things out if you deal with it upfront.
When You Own a Small Business
(6) In my view, because I am a business owner, when it comes to how a small business gets transferred to the next generation, all bets are off when it comes to forcing some equal distribution of the estate, particularly when either certain children work in the business, or when you want to leave your ownership interest in the small business only to certain children or beneficiaries. My first thought is that running a business is hard, and many small businesses fail when ownership moves to the next generation, so when you try to equalize things by leaving your interest in the business to one child, and most or all of your cash, investments, and other assets to another child or children, the child who is trying to salvage the small business may wind up on the short end of the stick. Also, if you want to be equal while leaving your ownership interest in your business to one child, while leaving other assets to other children, note that putting a value on a small business can be subjective. Reasonable minds can differ on the value of a business, so there may be conflict when a business needs to be valued at your death in order to equalize bequests to children. I can’t solve every business owner’s dilemma in this video - I can only say proceed with caution and monitor your estate plan regularly when a significant asset in your estate is your ownership interest in a business and you are not leaving that ownership interest equally to your heirs.
Fairness When Naming Your Advocates
And (7), one of the biggest mistakes parents make when setting up an estate plan is that they feel compelled to name all of the children to be forced to work together on things like your power of attorney, executor of your will, or successor trustee of your Revocable Living Trust. These can be difficult jobs to perform at stressful times and you need to appoint the RIGHT people for the job, whether that is one person or multiple people, rather than naming everyone to work together which can turn into a train wreck when lots of minute but important decisions need to be made.
So bottom line here is: fair does not always mean equal; these are 100% your decisions: and keep these seven items in mind when you are creating and maintaining your estate plan.
Now go out and have a great day and a great life.