When equal isn’t necessarily fair …
Equality is a concept that many trustors use as a baseline when deciding how to divide up their estate. It is much simpler and the initial perception might be that “fair” clearly means an equal split of all assets to beneficiaries – but this isn’t necessarily the case. In many circumstances, equal distribution of assets among beneficiaries is the right choice, but there are some cases where fair/equitable distribution better suits the trustor’s goals.
What is equal vs. fair distribution?
In an “equal” division of inheritance, each beneficiary gets an identical portion. For example, if you have four children and an estate worth $1,000,000, each child would inherit assets worth $250,000.
A “fair” or equitable division of inheritance is when each beneficiary is left an equitable share of an estate in a will. The definition of what is fair is discretionary and takes into account various external factors.
What factors lead to equitable/fair distribution?
The decision to divide your assets unequally between your beneficiaries is often based on an array of considerations, including your goals, circumstances of beneficiaries, family dynamics, financial needs of younger family members, strong vs. strained relationships, etc. As such, there are unlimited scenarios that could lead to equitable distribution. Here are a few:
- Previous support: Some individuals may already have received a significant amount of money or property from you during your lifetime (e.g., college education), while perhaps other children have yet to attend college and are “due” this support (and perhaps an inflation adjustment, if college costs have increased). In this case, unequal distribution is an attempt to even out the amount given.
- Caregivers: With longer lifespans, it is common for elderly parents to live with a child. If one child has given up their lifestyle, career/life goals, etc., in order to take care of elderly parents, it is common to allocate a larger cut of the assets. For example, if a caregiver sold his/her home to stay with parents, then perhaps it may be fair to leave your home to that child.
- Strained relationships: As parents, you may have one child who has been dedicated and sought a close relationship with you, while another child chose to be estranged. Is it fair to give both the same amount?
- Grandchildren support: Looking to future generations, you may seek to be very fair in supporting grandkids. Many trustors believe that an adult son or daughter who has children should receive more than a child who does not have children of their own. Or you might have three children, with corresponding families of one child, two children and four children. Equitable distribution would make sure all grandchildren receive the same amount (i.e., dividing their portion seven ways) vs. simply giving each family one-third.
- Blended family spousal assets: Instead of automatically dividing marital property down the middle, consider separate property (i.e., property acquired by yourself or your spouse before marriage or individually during marriage).
- Blended families with stepchildren: Another common reason for unequal distribution is gifting to biological children and stepchildren. In some cases, trustors wish to give biological offspring a full portion of the estate and bequeath a partial portion to stepchildren.
- Destructive addictions: If a beneficiary suffers from some sort of destructive addiction, it is more than likely that the assets bequeathed would be used to further their destructive addiction. Perhaps consider a trust designed to care for the addict without directly giving any money, property, or other assets.
- Disabilities: If you have a family member who suffers from a disability or handicap, in many of these instances the individual is receiving governmental benefits; if that person were than to receive a sizable amount of money or assets from an estate, they would lose those benefits. To preserve those benefits and to continue to provide support for this family member, a parent can choose to develop a Special Needs Trust.
- Tax situations: A critical but often neglected decision is the impact of taxes. If the inherited assets are taxed at different rates, those who inherit assets with a higher tax rate will get less value out of the estate (e.g., IRAs vs. real estate vs. brokerage accounts).
- Expertise in asset management: It is very common for certain heirs to have very little interest or competency in managing certain assets (i.e., real estate, stock holdings, etc.) and in fact, some trustors are hesitant to allocate such holdings to these heirs. Your estate planning attorney can offer possible solutions.
- Real estate holdings: Perhaps one child cherishes the family heirloom vacation home and another child wants a rental property (in which case, the former property has annual costs and is not to be sold, while the latter can be sold and also generates income). The income and expense of each property are substantially different and may need to be considered in overall fairness. Also, how can you designate specific real estate if your heirs live across the country and may not be able to care for it?
- Sentimental assets: In certain situations, beneficiaries are willing to accept a lower monetary value (e.g., a lower value generational family property or furniture), but in their eyes, the personal value of their inheritance may be equitable.
- Family business ownership: This can be one of the most complex considerations in estate planning. Perhaps one child is better suited to run the business (or other children may not want it) but there are still numerous factors involving valuation, taxation, asset growth potential, liquidity, etc. An experienced estate planning attorney should have significant experience in advising and structuring these situations.
- Inherited assets: Perhaps your parent left you with assets (such as a business or vacation home) that was intended to stay perpetually within the family. In this case, you’ll likely consider which child/beneficiary is better equipped to continue this tradition. This may have very little to do with the financial value of the asset.
How to avoid litigation and conflicts?
As shown in these examples, there are certain instances when fair doesn’t necessarily have to mean equal. At the same time, it’s easy to see how fair/equitable distribution could go massively wrong, whether through improper communication, strained relationships or in-laws who stir the litigation pot.
Ultimately, you have the right to do as you wish with your estate. Whatever the reasoning, whenever there is a fair/equitable distribution, there is correspondingly an increased possibility of an estate being challenged. Further, most attorneys will advise that it is important to evaluate how such allocations may hurt family relationships vs. equal inheritances. As a result, some attorneys default counsel is to “always try to divide assets in an equitable manner to limit the likelihood of any future resentment and avoid possible litigation.” However, such advice may be in conflict with the trustor’s wishes. The trustor may question whether it Is fair to divide assets equally when he/she believes certain heirs don’t deserve their portion, or other goals (such as business ownership) are clearly contradictory with equal distribution. When perceived inequality is a concern, take the time to talk with your attorney about various options and your goals. In essence, plan wisely when leaving substantially different amounts of assets between key beneficiaries.
In many cases, discussing your intentions and reasons with beneficiaries during your lifetime can avoid significant personal conflicts and litigation later. Consider having personal and/or family meetings with your attorney present, in order to clearly document your wishes. Even if benefactors don't agree with your decision, they will at least be aware of the reasons behind them. Another value of such meetings is that while you may feel that your estate plan has an equitable distribution of assets, your beneficiaries may have different viewpoints. It can be worthwhile to consider why they see things differently before laying your final directions, as wise counsel from different perspectives can be not only beneficial for structuring fair distribution but also can help to avoid future conflicts.
Overall, work carefully with your attorney to be clear on your intentions, while considering the potential problems. An experienced estate planning attorney can help you craft a custom plan that will carry out your goals of supporting each beneficiary as you like. Your attorney should not only provide proper advice but also offer good recordkeeping for decisions, and act as a neutral third-party witness who can support your positions (as well as testimony on cognitive reasoning and decision-making). There is no law, or rule, or requirement that distribution must be equal, however, fair/equitable distribution simply makes the process more complicated. Considering that you’ve spent a lifetime building your estate, it is more than worthwhile to carefully evaluate how you wish to distribute it. Finally, estate plans are meant to be dynamic, living documents that should be reviewed and possibly changed over time.
About the author:
Tamsen R. Reinheimer, Attorney, is a Certified Specialist in Estate Planning, Trust & Probate Law (The State Bar of California Board of Legal Specialization). She has significant experience in all aspects of estate planning, trust administration, and probate. Contact Tamsen at firstname.lastname@example.org.