Estate Planning and Unequal Inheritances: Open Communication Can Help Siblings Understand the Reasons Why
When most of us were growing up, fairness was everything. If our slice of birthday cake was a millimeter or two smaller than the slice served to Johnny or Janey, we probably had a fit and claimed, “That’s not fair!” For the majority of people, beginning in childhood, “fair” has always meant “equal.”
But does that standard necessarily apply when allocating an estate? What if we feel we have good, legitimate reasons to divvy up our assets unequally, favoring one beneficiary over another? Can that be “fair”? And how do we avoid the family battles that an imbalanced bequest can trigger? It’s a topic we’ve covered before here at AgingOptions and Life Point Law but nevertheless it’s an important one that bears another look.
This time we’re viewing the topic of unequal inheritance through this article that we recently encountered from Kiplinger. The piece was written by someone who does this for a living, Chicago attorney David Handler, a partner in a firm called Kirkland and Ellis. Handler talks with experience about the question of “fairness” versus “equality” in the area of bequests, and he offers sage advice on how to avoid letting an imbalanced inheritance tear your family apart.
Greatest Potential for Family Conflict
Writing in Kiplinger, Handler begins, “Among all the considerations that emerge in estate planning, none poses more potential for conflict than attempting to ensure fairness in what children will inherit. That said, fairness is in the eye of the beholder and doesn’t necessarily mean equal. For those who are making the estate plan, the money is theirs, and they can distribute it as they choose.”
But Handler goes on to warn that if “family harmony” is important to you, especially after you pass away, then discussing estate planning decisions with children in advance can really help, especially if there are any elements that may be seen as unfair.
“Giving away money is easy to do poorly,” he adds, “but difficult to do well.”
Passing Along the Family Business
Handler explains that one of the most common situations in an estate plan where unequal shares are dictated is when there are unique assets or properties involved, like an ongoing business. To illustrate, he gives us a hypothetical estate plan that impacts two grown children: John, a doctor, and Lucy, who runs the family business.
“In such a case,” Handler writes, “the parents could feel it makes sense to leave the business to Lucy and other assets to John. Maybe Lucy has helped grow the business from a $5 million valuation to $15 million. To ensure that John is being considered, too, perhaps the parents will provide him with $10 million through a combination of investments and life insurance. John could be upset that he inherits less than Lucy, so we’d suggest explaining in advance that the value of the business is very prone to fluctuation. Thus, Lucy is assuming more risk, while John’s inheritance is smaller now but more predictable.”
More risk and more reward is what Handler calls a “common concept in both investing and life.” In this case, combining investments with life insurance “combines a guaranteed return of life insurance with the upside of the market.”
Addressing Differences in Need
Taking into account differences in need is another factor in unequal-inheritance situations, especially if one sibling is struggling and another is wealthy. Handler calls this “a difficult situation to address with an estate plan.”
“Do you give less to the wealthy child and more to the other child who might be less hardworking or has perhaps made unwise decisions with their money?” he asks. “That doesn’t seem fair. Or perhaps the less wealthy child chose a less remunerative profession but works just as hard as his or her sibling, and the wealthy sibling may have simply been lucky to work at a company that awarded stock options before going public.”
But there are options. It might be best to just be honest with the wealthier sibling, explaining that they will receive less because of their sibling’s needs. Or, one potential solution could be to split the inheritance equally, but explain to the more successful child, “I know you don’t need this money, so what I’d like you to do is set part of it aside. If your sibling ends up needing it, please take care of them for me. You don’t have to, but that would be my wish.”
When Charities Get the Larger Share
Sometimes the beneficiary receiving the unequally large share is a charity.
“For example,” Handler explains, “if each child receives $20 million, but the parents establish a foundation that will receive $300 million, the children are more likely to focus on the imbalance than on how fortunate they are to have inherited $20 million. That aggravation can be heightened if the foundation requires significant work by the children to manage. In this case, we would recommend strong communication with the children and for the parents to explain their WHY.”
“Further,” he adds, “there is a responsibility in managing a foundation, and if the next generation is not excited about the opportunity to make a difference, it might be more advisable for the parents to make a substantial donation to a specific charity or charities while they are alive.”
As Handler points out, a parent’s death is not a good time for “additional stress or unpleasant surprises.” Transparent discussions can help to mitigate any woes, introduce you to new perspectives you might not have thought about, and can lead to good changes. “This will provide added information and some peace of mind for all parties involved,” Handler writes.
Estate Plans Can’t Resolve Underlying Family Issues
Perhaps thanks to pop culture or just misunderstanding, people often have a misguided view of what estate plans can and can’t do, thinking they can cure various family issues.
“Unfortunately,” Handler writes, “if kids are spoiled, unmotivated or don’t get along with each other, an estate plan won’t fix those problems. If one’s children are not upstanding citizens, dedicated parents, hardworking or charitably minded individuals, a pile of paper won’t bring about a sudden transformation. Create your estate plan based on who people are, not an idealized version of your family members.”
Bottom line: an estate plan is only about wealth transfer, nothing else. The rules and restrictions you put in place can affect change in the hoops people have to jump through, but they almost certainly won’t change anyone’s character, personality, or skills.
“If an individual isn’t a hard worker, they’re not going to become one because an estate plan dictates that they must have a job to receive their inheritance,” Handler explains. “They might work just hard or long enough to satisfy the requirements, but they won’t like working any more than they already did, nor will they suddenly become entrepreneurial if that’s not part of their genetic makeup.”
Don’t Expect a Family Foundation to Produce Harmony
Also, creating a family foundation won’t create family harmony just because you hope it will. The idea of having your kids gather every year to decide on charities may sound nice, but if they have different opinions on values, causes, or about each other, disagreements will flare up.
“So,” Handler writes, “rather than trying to use words on a page to influence family dynamics after one dies, we recommend emphasizing family communication about wealth and the estate plan during one’s lifetime. Everyone needs to understand wealth comes with responsibility. Some parents feel uncomfortable discussing money issues with their children. Others are concerned that if the kids realize how much money they will inherit, it may make them less motivated.”
Combining Clear Communication with Financial Education
“We tell our wealthy clients that their children likely already know their parents have a lot of money,” Handler writes. “While they may not know exactly how much, they almost certainly have a general awareness based on where they live, lifestyle or by Googling their parents. So, if it’s no secret, why not communicate and allow them to plan ahead, particularly if they have families and are planning career choices and savings for home purchases, higher-education costs and eventual retirement? Taking this step can also help ensure they at least understand the parent’s estate plan and allow open communication about the rationale and philosophy behind its creation.”
The good news is that there is a lot of help, ready for you to utilize it. Financial advisory firms often offer investment counseling to “the next generation,” and most estate tax attorneys are happy to converse about trusts, prenuptial agreements, and other such considerations.
Handler concludes, “Part of a parent’s role is to prepare their children for all that life may bring, including managing wealth. Think about it like this: You may have tutored your kids in math, science and history while growing up, and helped them learn to ride a bike, drive a car, and play sports or musical instruments. So why leave them a vast sum of money without lessons about how you built it, how to manage it or which financial professionals you find trustworthy and knowledgeable?”
Breaking News: Rajiv’s New Book is Here!
We have big news! The long-awaited book by Rajiv Nagaich, called Your Retirement: Dream or Disaster, has been released and is now available to the public. As a friend of AgingOptions, we know you’ll want to get your copy and spread the word.
You’ve heard Rajiv say it repeatedly: 70 percent of retirement plans will fail. If you know someone whose retirement turned into a nightmare when they were forced into a nursing home, went broke paying for care, or became a burden to their families – and you want to make sure it doesn’t happen to you – then this book is must-read.
Through stories, examples, and personal insights, Rajiv takes us along on his journey of expanding awareness about a problem that few are willing to talk about, yet it’s one that results in millions of Americans sleepwalking their way into their worst nightmares about aging. Rajiv lays bare the shortcomings of traditional retirement planning advice, exposes the biases many professionals have about what is best for older adults, and much more.
Rajiv then offers a solution: LifePlanning, his groundbreaking approach to retirement planning. Rajiv explains the essential planning steps and, most importantly, how to develop the framework for these elements to work in concert toward your most deeply held retirement goals.
Your retirement can be the exciting and fulfilling life you’ve always wanted it to be. Start by reading and sharing Rajiv’s important new book. And remember, Age On, everyone!
(originally reported at www.kiplinger.com)