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 [read the full article here].
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:
Family situations:
- Previous support: Some individuals may already have received a significant amount of money or property from you during your lifetime while perhaps other children are "due" this support. In this case, unequal distribution is an attempt to even out the amount given.
- Caregivers: 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.
- Grandchildren support: 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 families: Instead of automatically dividing marital property down the middle, some couples consider separate property acquired before marriage. Also gifting may be done differently for biological children and stepchildren.
- Destructive addictions: Perhaps consider a trust designed to care for the addict without directly giving any money, property, or other assets.
- Disabilities: Consider a Special Needs Trust if you have a family member who suffers from a disability or handicap, in order to preserve government benefits and to continue to provide support.
Asset considerations:
- Tax situations: 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.
- Expertise in asset management: For heirs who have very little interest or competency in managing certain assets, key decisions need to be made.
- Real estate holdings: This is a complex area that has many considerations, including income potential, tax, valuation, management abilities, personal living needs, etc.
- Family business ownership: It may be that 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.
- Inherited assets: Perhaps your parent left you with assets 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.
How to avoid litigation and conflicts?
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 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.
Overall, work carefully with your attorney to be clear on your intentions, while considering the potential problems. 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).
Decades of Experience in Estate Planning
At Mortensen & Reinheimer, PC we know that our clients may have specific goals for certain assets and beneficiaries and need legal guidance in how to best achieve these objectives. We are here to help you determine the best way to accomplish your goals - whether they be fair or equal - for distributions to your beneficiaries. We look forward to helping you with this important process! Please contact us at (714) 384-6053 to make an appointment, or use our online contact form. Our website is http://www.ocestateplanning.net.
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 tamsen@ocestateplanning.net.