How Equal Splits Became The Norm

Historically, the oldest son inherited most of the estate, while daughters and younger sons received far less. As social norms shifted, families viewed that approach as unfair. Equal inheritances became the standard.

Many people still see an estate plan as a final statement of how parents feel about their children. Unequal distributions can lead to hurt feelings, resentment or even lawsuits.

Yet, many parents resist equal distributions because they know their children aren’t equally responsible, do not have the same prospects or talents, haven’t achieved the same level of success or didn’t receive the same support over the years.

More parents — especially those with valuable estates — now question whether equal distributions make sense.

When Equal Doesn’t Feel Fair

Parents often wrestle with questions such as:

• Should a financially successful child receive the same inheritance as a child who earns less?
• Should it matter if the lower-earning child works hard and is responsible but chose a lower-paying career?
• Should a child who struggles with money or substance abuse receive less or even nothing?

Some estate planners say they see more families choosing unequal distributions for these reasons. They often describe three approaches to dividing an estate: fairly, equally or equitably. Parents can use one method or combine them.

Three Ways To Divide An Estate

Consider a hypothetical couple, Max and Rosie, who want to use all three approaches.

They decide to support each child’s education as far as the child wants to go, including graduate or professional school. A child who chooses trade school, community college or an apprenticeship receives the support needed for that path.

This is known as a fair allocation of wealth. Each child gets the same opportunity to pursue their interests, even if the cost varies.

Parents can limit fair-allocation gifts to education or expand them to first-home support, business start-ups, travel, medical care or childcare. These gifts usually occur the parents’ lifetimes and often have dollar limits or age deadlines.

Also, there might be a dollar limit based on the parents’ resources. There also could be a use-it-or-lose-it deadline, such as requiring education or first-home spending to be concluded by the time each child reaches a certain age.

After making fair-allocations gifts, Max and Rose divide the remaining estate into two parts.

One part goes to equitable gifts — special bequests to people who helped them or contributed in meaningful ways. Business owners may leave equitable gifts to key employees or to all employees. A child who helped build the business or cared for an ailing parent might receive an equitable share.

An equitable distribution is often a cash payment. But it can be the bequest of a particular piece of property, a personal item or a share of a business. The appropriate form often depends on the reason for the bequest.

The rest of the estate is divided equally among the children. Equal doesn’t mean joint ownership of every asset. It means each child receives approximately the same value from the estate.

The blended approach works because each type of gift serves a different purpose:

• Fair gifts primarily motivate and support children early in life.
• Equitable gifts reward contributions, whether they are children, grandchildren or other relationships.
• Equal gifts provided long-term financial security for the children and perhaps their children.

An common alternative is to give fair-allocation gifts during life and divide the estate equally at death — but subtract the value of lifetime gifts from each child’s share. A child who received more support earlier receives less later. Some families use this method for gifts made after a child graduates from college or turns 21.

Why Transparency Matters More Than The Math

Deciding how to allocate an estate using one or more method is the first step of planning. Instead of automatically opting for equal distributions, consider the alternatives.

To avoid causing or worsening problems among the children, however, the plan must be transparent.

Children and any other heirs should be informed of the plan early. There must be regular communication and education about the plan, what each child is likely to inherit and when it will be received.

The best estate plan on paper doesn’t work if the children learn about the assets and plan only when it is final and the reasons for it aren’t clear.

One purpose of communication is so each child knows the plan and the thinking behind it. They must know why the siblings might not receive the same amounts over their lifetimes. Knowing the plan also can influence a child’s decisions during life.

When there’s no transparency, it is very likely that one or more children will feel they were slighted, left out or loved less.

In many cases, this leads to hard feelings among the children. In extreme cases, it leads to litigation over the estate. A child who receives less might sue the others, alleging undue influence, fraud or other claims. Then, much of the estate is likely to be paid to lawyers instead of the children and other intended beneficiaries.

Another reason for transparency is so the children can prepare.

Some children might not receive as much of an inheritance as they expected. Their long-term financial plans assumed the larger inheritance. They will have less financial security than they would have if they had known the inheritance would be less and planned accordingly.

Other children need to prepare to handle the inheritance. Often, it is the most money they will receive at one time and might exceed what they accumulated and managed on their own.

They need to have a plan for handling it. Otherwise, a portion of the inheritance is likely to be lost through mismanagement, fraud or other means.

Using Trusts To Smooth The Transition

Some parents leave money in trusts for at least a few years. A trustee manages and distributes the funds until the parents believe the child is ready to manage it.

When money is left in trust, explain the reasons why. Sometimes the trust beneficiary treats the imposition of the trust as a slight or criticism instead of appreciating.

Communications should be in person. Each affected family member should have the opportunity to hear the plan and the reasons for it. Each also should be able to ask questions and voice any objections.

A goal of estate planning usually is to ensure the wealth you accumulated, however much or little, improves the lives of at least one more generation of your family. You also would like the wealth transfer to increase family unity and harmony.

Keys to achieving those goals are deciding how to distribute the estate and communicating that decision to family members.