Can Unequal Inheritances Be Fair?

Estate planning attorneys aren’t often asked to create estate plans treating heirs unfairly. However, when they do it, it is usually because a parent is estranged from one child and wishes to leave him or her nothing. When it comes to estate planning, equal isn’t the same as fair, explains the article “Are Unequal Inheritances Fair?” from Advisor Perspectives.

An example of this can be seen in the case of a widow with four adult children who asked an estate planning attorney how to approach distributing her assets. Three of her children were high-income earners, already building substantial net worth. A fourth child had mental health issues, limited education, had been in and out of jail and was unable to hold a job.

She understood that her fourth child needed the financial stability the others did not. She wanted to provide some support for him, but knew any money left directly to him would be gone quickly. She was considering leaving money for him in a trust to provide a monthly income stream, but also wanted to be fair to the other three children.

The trust would be the best option. However, there were problems to consider. If the estate were to be divided in four equal parts, the fourth child’s share of the estate would be small, so trustee fees would take a significant amount of the trust. If she left her entire estate for him, it would be more likely he’d have funding for most, if not all, of his adult life.

The worst thing the mother could do was to leave all the funds for the fourth child in a trust without discussing it with the other three siblings. Unequal inheritances can lead to battles between siblings, sometimes bad enough to lead them into a court battle. This is often the case where one child is believed by others to have unduly influenced a parent, when they have inherited all or the lion’s share of the estate.

Sibling fights can occur even when the children know about and understand the need for the unequal distribution. The children may suppress their emotions while the parent is living. However, after the parent dies and the reality sets in, emotions may fire at full throttle. Logically, in this case the three successful siblings may well understand why their troubled sibling needs the funds. However, grief is a powerful emotion and can lead to illogical responses.

In this case, the woman made the decision to leave her estate in equal shares to each child and giving the three successful siblings the options to share part of their inheritance with their brother. She did this by having her estate planning attorney add language in the will stating if any child wanted to disclaim or refuse any of their inheritance, it would pass to a trust set up for the troubled sibling. This gave each child the opportunity to help or not.

Was it a perfect solution? Perhaps not, but it was the best possible solution given the specific circumstances for this family.

Reference: Advisor Perspectives (Aug. 22, 2022) “Are Unequal Inheritances Fair?”

How Can Estate Planning Address the Troubled Child?

Every family has unique challenges when planning for the future, and every family needs to consider its individual beneficiaries in an honest light, even when the view isn’t pretty. Concerns may range from adults with substance abuse problems, an inability to make good decisions, or siblings with worrisome marriages. These situations can be addressed through estate planning documents, says the article “Estate Planning for ‘Black Sheep’ Beneficiaries” from Kiplinger.

How can you prepare your estate, when a problem child has grown into an adult with problems?

You have the option of not dividing your estate equally to beneficiaries.

Disinheriting a beneficiary occurs for a variety of reasons and is more common than you might think. If you have already given one child a down payment on a home, while another has gone through two divorces, you may want to make plans for one child to receive their share of the inheritance through a trust to protect them.

A family member who is disabled may benefit from a more generous inheritance than a successful sibling—although that inheritance must be structured properly, if the disabled person is to continue receiving support from government programs.

No matter the reason for unequal distributions, discuss the reasons for the difference in your estate plan with your family, or if your estate planning attorney advises it, include a discussion of your reasons in a document. This buttresses your plan against any claims against the estate and may prevent hard feelings between siblings.

You can change your mind about your estate plan if your ‘wild child’ gets his life together.

A regular evaluation of your estate plan—every three or four years, or whenever big life events occur—is always recommended. If your wayward child finds his footing and you want to change how he is treated in your estate plan, you can do that.

Your estate plan can include incentives, even after you are gone.

Specific provisions in a trust can be used to reward behavior. An incentive trust sets certain goals that must be met before funds are distributed, from completing college to maintaining employment or even to going through rehabilitation. Many estate plans stagger the distribution of funds, so heirs receive distributions over time, rather than all at once. An example: 1/3 at age 25, 1/2 at age 30 and the balance at age 40. This prevents the beneficiary from squandering all of his inheritance at once. Ideally, his financial skills grow, so he is better equipped to preserve a large sum at age 40.

Trusts are not that complicated, and their administration is not overly difficult.

People think trusts are for the wealthy only or are complicated and expensive. None of that is true. Trusts are excellent tools, considered the “Swiss Army Knife” of estate planning. Your estate planning attorney can craft trusts that will help you control how money flows to heirs, protect a special needs individual, minimize taxes and create a legacy. For families who have one or more “black sheep,” the trust is a perfect tool to protect your loved ones from themselves and their life choices.

Reference: Kiplinger (Dec. 8, 2020) “Estate Planning for ‘Black Sheep’ Beneficiaries”