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Wednesday, February 13, 2013

Fairness and equality in estate planning

When meeting with me to establish or update their estate plans, my clients often ask me for advice on how to treat their children “fairly” or “equally.” The meaning of these terms depends on a client’s value system, financial condition, family circumstances, and a variety of other factors. For some parents, it is “fair” to disinherit a son from their estate because he never repaid substantial loans. For others, it is “fair” to leave a family business to a daughter because she played a significant role in making it successful. Decisions on how to treat children fairly are among the most difficult and stressful in designing an estate plan. While every situation is unique, below are some helpful tips parents should consider when deciding how to leave their assets to their children.

Parents are under no obligation to treat their children exactly equally.

It is important for parents to remember they accumulated their wealth and it is their prerogative to transfer it however they wish. Now, I do not recommend that parents arbitrarily favor one child over another in their estate plan. Transparently unequal treatment of a child in a will or trust can cause hurt feelings or damage relationships among siblings. However, I do encourage clients not to worry themselves sick about making sure that every last penny is divided in exactly equal amounts and on equal terms among their children. Anyone who has raised teenagers knows it is nearly impossible to treat them equally. Not surprisingly, teenagers that have run-ins with the law generally are not allowed to take summer road trips to Las Vegas. Responsible teenagers, on the other hand, generally avoid a strict curfew. Just as teenagers occasionally require different treatment, it may be wise to treat adult children differently in an estate plan. For example, an adult child constantly living on the brink of bankruptcy should probably not receive a large inheritance all at once. Instead, it may be preferable to leave his inheritance in a trust from which he is restricted from demanding distributions.

Leaving real estate equally to multiple children can cause headaches.

Clients frequently insist that a particular piece of property “must be kept in the family.” They want to be fair to all of their children, so they ask me draft a will leaving a 500-acre piece of farmland equally to all six of their children. There are situations in which joint ownership of property produces fine results. However, in my experience, it often leads to frustration and discord in families. What happens when three of the children wish to sell the property for cash, but the other three wish to “keep it in the family?” The answer is not always pleasant. If they own the property as tenants in common, a child wishing to sell her interest could sue her siblings and force a partition – a legal division – of the property. These disputes are costly, not only in terms of the dollars spent on legal fees and court costs, but also in terms of the emotional toll they take on families. Through thoughtful estate planning, it is usually possible to find a satisfactory solution that avoids intra-family conflicts while providing for all of the children.

Make an estate plan.

If you do not have a will or a trust, you actually do have an estate plan, believe it or not. Your estate plan is the law of intestacy, which is a collection of statutes that determine what happens to a person’s property when he dies without a will. These statutes are designed to approximate what the Idaho legislature believes most people would have done if they had left a will. Generally, these statutes divide property equally among a deceased person’s children (unless there is a surviving spouse). While this result may be perfectly acceptable to some, it may be disastrous for others. For example, if a Medicaid recipient’s parent dies without a will, the Medicaid recipient could immediately lose Medicaid eligibility due to an inheritance from the parent’s estate. While a statutorily required equal distribution of assets may appear “fair” at first blush, the Medicaid recipient could be required to spend his entire inheritance in order to regain Medicaid eligibility. The parent should instead establish a supplemental needs trust for the Medicaid child in order to avoid loss of eligibility upon the parent’s death.

While there is no universal answer to the question of what is fair in estate planning, discussing your particular situation with a qualified professional is an excellent first step in discovering the best solution.

Michael W. Brown is a shareholder with the law firm of Beard St. Clair Gaffney PA. He concentrates his practice in the areas of trusts, wills, estate administration, and business succession planning. He can be reached at (208) 523-5171 or mbrown@beardstclair.com
Staff at 12:43 PM
Estate Planning
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