One of your children decided to become a kindergarten teacher and earns $50,000 a year. Your other child decided to be an investment banker, earning $150,000 a year plus a bonus. You love them equally, but what would be the fairest way to distribute your estate given the disparity in their incomes?
The child who’s an investment banker has never asked you for any money; you paid the down payment for your kindergarten teacher child’s first home. Now, how should you proceed?
Not an Easy Task
Dividing assets equally among children in a will might be a popular aspiration for parents, but it’s rarely an easy one. Estate planning decisions are often fraught with family dynamics that breed anxiety, jealousy and resentment and can sometimes have lasting detrimental effects on sibling relationships. That investment banker child might think, “My sibling could have chosen a more lucrative career. Why should I suffer because he didn’t prioritize financial security?” The kindergarten teacher might respond with, “I will never make the salary my sibling does. Why shouldn’t that be acknowledged in the inheritance?”
The primary goal for parents is usually to foster a cohesive and happy family unit. And while dividing an estate among more than one child can trigger some unpleasant emotions, parents should take comfort in knowing there are a number of approaches and precautions to consider that will help ensure all parties remain satisfied and conflict free.
Expectation of Fairness
The first step to drafting a conflict-free estate plan is understanding that children expect to be treated fairly. Parents who want their children to maintain an amicable relationship should think about crafting a will in a way that will be understandable to everyone and will encourage siblings to stay together as a family. The end result is different in every case, but the decisions parents make should be centered on this goal.
Parents may have provided for one child’s immediate financial needs, such as a down payment on a home, additional schooling or a debt pay-off. Should these lifetime gifts be deducted from that child’s share in the inheritance and “made up” to the other children who didn’t receive similar gifts?
Unfortunately, there’s no right answer here. If parents and siblings believe the gifts were necessary, they may not think it’s appropriate to compensate the other children accordingly. However, if the gifts were discretionary or part of a plan to, for example, give each child a down payment on a house, there could be equalizing bequests.
Parents might opt to exclude a child who’s well off financially. Problems can arise if children are treated differently based on their current situation, and that situation changes. For example, divorce, job loss, health issues and other life events may have unexpected adverse effects on that child.
Use of Trusts
There are options for smoothing out these fairness issues. If one child is needy, not financially sophisticated or under pressure from a “bad” spouse, instead of leaving assets to that child in trust and the other child outright, leave both bequests in trust, but give the more sophisticated child more control. That additional control could come in the form of a right to withdraw assets, a co-trustee position, or a right to direct assets on death.
Some parents may wonder if it’s wise to include grandchildren in a will, a decision that has become increasingly popular as people live longer lives. Grandparents can take advantage of the generation-skipping transfer (GST) tax exemption, which allows assets to pass tax free to grandchildren.
A GST tax exempt trust is a great vehicle for facilitating this tax-free transfer. It’s also another way to handle financial imbalances among children. The trust can be set up to benefit children and grandchildren and continue to transfer tax free in trust to great-grandchildren and even to more distant generations. For a child who’s financially well off, the trust can be set up to benefit grandchildren directly. Or, rather than leave money directly to grandchildren if one child doesn’t need the money, leave property to both in a skipping GST trust that includes grandchildren and great-grandchildren as beneficiaries, understanding that distributions will be made to the needier child in one case and money saved for later generations in the other. Of course, grandparents should consider whether a gift to a grandchild would be detrimental to the relationship between the grandchild and the grandchild’s parent.
Select Qualified Trustee
Other questions arise around how parents can ensure the wealth they pass down is managed fairly with respect to the interests of future generations. When assets are meant to benefit multiple generations through a GST tax exempt trust, the selection of a qualified trustee is critical. Appointing a family member, especially a sibling or other very close relative, as sole trustee can be problematic because it’s sometimes difficult to be both a family member and a fiduciary, who must be impartial.
The trustee you select is in a position to make discretionary decisions, including how assets are distributed. These decisions aren’t always black and white, and very personal information is sometimes required from the beneficiaries for the trustee to be able to make prudent decisions. Family dynamics can deteriorate significantly when a single family member is put in such a powerful position.
It’s far better to appoint a neutral trustee, ideally a professional, who can be highly objective and can manage the assets and protect the interests of the current generation, as well as the interests of future generations. Professional trustees, have the experience needed to make firm yet fair decisions, and since these trusts can last over many decades, appointing a professional trustee eliminates the risk of the trust outliving the trustee.
It’s possible to be fair and treat children equally by using trusts for all of the children, even if the children’s needs are vastly different. But exactly how the trusts are administered will vary from child to child depending on that child’s needs and a well-respected corporate trustee can ensure your intentions are carried out. The will itself, however, on its face will be fair and equal.
Gail E. Cohen is Vice Chairman and General Trust Counsel for Fiduciary Trust Company International