Estate Planning and Unequal Inheritances: Talking Is Key

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.

However, if one wishes to maintain family harmony after they’ve passed away, we would highly recommend discussing estate planning decisions with children in advance, particularly if there are any elements that could be perceived by them as unfair. Giving away money is easy to do poorly, but difficult to do well.

Typically, when an estate plan dictates unequal shares, it’s because unique assets or properties are involved, especially ongoing businesses. Let’s consider a hypothetical estate plan that impacts two grown children: John, who is a doctor, and Lucy, who runs the family business.

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In such a case, 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 a common concept in both investing and life. Combining investments with life insurance combines a guaranteed return of life insurance with the upside of the market.

Addressing Differences in Need

Another potentially unequal situation occurs when children have significant need differences. Let’s say one is incredibly wealthy, and the other is struggling to get by. That’s 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? 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. 

One potential solution is to split the inheritance equally between the two children, but pull aside the more successful child and say, “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.” Or just be honest with the wealthier child and explain that his/her sibling will inherit more because of their greater need.

A third scenario arises when parents plan to leave more money to charity than to their children. For example, 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, 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.

A parent’s passing is not a good time for additional stress or unpleasant surprises. While all decisions are ultimately up to you, transparent discussions can introduce perspectives you had not previously considered and lead you to make positive modifications. This will provide added information and some peace of mind for all parties involved.

Estate Plans Aren’t a Cure-All

People are sometimes misguided about what can be achieved with an estate plan, seeing them as potential cure-alls for various family issues. Unfortunately, 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.

An estate plan is about wealth transfer, and that’s it. Rules, restrictions and limits can be put in place, but those elements won’t change people’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. 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.

Similarly, setting up a foundation itself won’t create family harmony. Some parents think, “It will be great that the kids can come together every year and decide on charities.” Yes, that does sound lovely. They’ll gather annually and probably won’t fight over the money because it isn’t theirs anyway. But if siblings have different views on their valued causes or don’t like and respect one another, they won’t suddenly become best friends.

So 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.

We tell our wealthy clients that their children likely already know their parents have a lot of money. 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.

Offering Education

Fortunately, there’s a lot of help out there. Many financial advisory firms offer investment counseling for the next generation, and most estate tax attorneys would be willing to converse with them about trusts, prenuptial agreements, and related considerations.

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?