I was working on an interesting estate planning case today and I thought I would get people’s opinion on the subject. At the end of the day this client wants to leave his assets in an unequal distribution schedule to his three children wherein one of the children will receive the lion’s share of the 8 digit estate.
I should mention right of the bat though, that while your opinion means something to me it won’t change the case as the number one priority in estate planning, at least in my humble opinion, is bringing to life the client’s testamentary intent.
Should You Distribute Your Estate Equally to Your Children?
It feels natural to just split everything between your kids, right? It is like using a simple will where you live everything to your surviving spouse and then if he or she doesn’t survive then to your children…it is comforting for some reason. But what if that isn’t equitable? Equitable being defined as
impartial or reasonable; fair; just
Two examples having to do with unequal distribution schedules that are probably more common then one would like to believe:
- What if you have 2 children and one is the prodigal son? Does that lost son really deserve half the estate? What if he was gone for 10 years? 20 years? 35 years?
- The whole concept of stepchildren and inheriting from a surviving non-parent without a Qualified Terminable Interest Property Trust.
What if the bequest has to do with a Family Business?
In the case I was working on today, it was three children and only one of the children worked in the family businesses for the past decade or two. As such, it is/was the parents’ intent to leave him the business to the detriment of his siblings. So Child 1 will receive the established businesses, and only after those specific bequests are made will the remainder be split into thirds.
Mom and Dad basically said he has stuck around and built those assets into what they are today and thus he deserves to get those assets even if it means that his siblings will get less.
Could you make that same decision?
What if other children sue because they believe child 1 coerced mom and dad? What if mom and dad’s legacy is now tarnished because child 2 and 3 (and the subsequent grandchildren) feel slighted?
An Easy Way To Fix Unequal Distribution to Heirs
There is an easy way to fix the unequal distribution issue, if you want to, however, you may not want to. To do so we would need a product or asset that could be obtained relatively cheaply and provide a lump sum which can be made certain or grow over time and be paid upon the passing of a specific person? Oh yeah…there is it is called Life Insurance.
I have done this type of strategy numerous times in the past, but I don’t think it will work here as parents don’t care about the unequal distribution, but:
- Specific bequest of business to Child 1
- Survivor Life Insurance purchased on mom and dad for pennies on the dollar
- Survivor policy is split between other children
Worst case scenario mom and dad die Child 1 gets his business other children get cash in an amount equivalent to the estimated value of the business. Best case scenario everyone lives forever.
Regardless of the “fix” would you consider distributing your assets unequally to your children? Have you ever received an unequal inheritance?
In my experience, everything has always been done very equally. I think this is the best way, otherwise your legacy will likely be one of resentment.
But what about the business involvement?
The best case scenario would be for parents to leave equal shares to their kids. I think that most families have a “favorite child” and to add money to the mix would just tarnish the siblings’ relationship after the parents are gone.
But what about the special situations of the client?
I think the best case scenario is to leave everything equal, but how often is that the fairest. Say you’re the one leaving the money, and you’ve got 3 kids, one of which was your primary caregiver for the last X years of your life, because you had some ailment other than “old age” where you’d need a lot of care – should this kid get screwed and get an equal share to the other two, who did drastically less in caring for you?
I have seen the care given problem come up many times…it is terrible and just breeds resent regardless of the distribution schedule.
Great post (and I am not just saying that like all of those cheap and fast commenters). When I was reading this, I thought, “I don’t care what he has to say, I would always side with equal distribution.” Then, when you threw the business aspect in, my plan to resist your persuasiveness was foiled. That makes the most sense to me. It wouldn’t seem right to split the business with the other children. I also like your idea about the life insurance.
The life insurance option is such an easy fix (AND CHEAP in some cases) it is ridiculous it isn’t use more often in these cases.
It is all just money and STUFF. I think it ought to be split equally. I would hate to have my kids feel as though I loved one over the other. I don’t want to pour on more grief!
There is an argument then maybe one should just sit down and explain the situation with the kids…b/c if you were to split evenly that one who worked harder/or at all in the business will have resentment = no win!
My kids aren’t much older than your little one so right now I would imagine splitting everything evenly among the 3 of them. But decades from now who knows? If they were in very different situations I could see where an unequal distribution would make sense.
It also matters the amounts we are talking…
I think it should be fair, and sometimes, fair is not equal in specific situations such as where one child contributed 10 years of his life to the family business, whereas the others didn’t.
I like that! Fair doesn’t always mean Equal…
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Unequal in your client’s case is what makes sense to me.
To bad the parents couldn’t have started to transfer the business assets to the “working with them” son to begin with. But then again, who thinks about that during the climb up…
That for sharing, I’ll all for unequal distributions in this case.
Love it MR! That’s actually what is happening…except it is for gift tax purposes and gifting.
I think careful thought should be put into how you divide your estate. It’s possible some of your children put more work into the family business or spent more time caring for you in your old age. It’s possible you don’t approve of how the money will be spent by one of your children when you pass. Regardless of your reasons for unequal distribution, it is YOUR money. You do what you want with it in life and in death.
Exactly! The only thing that matters is your testamentary intent!
[...] Journey To Millions: Unequal Distribution to Heirs – This makes total sense, and I would do the same as the business owner did with his [...]
I’m actually for unequal splits. I can certainly see situations when it’s appropriate and when it’s not.
In this case, with the business it wouldn’t be fair for the son NOT to get most of the business. He helped build it when the others didn’t.
I already know straight up that my parents estates will not be split equally. I’ll be getting less than “my share” I have no doubt about that.
I’m not splitting my estate equally either. My daughter is from a previous relationship and her father is still very much in her life. The way I see it is that my daughter and son will each get half of “my half” of our estate and my son will get all of “my husband’s half”. Which works out to 75% of our money going to my son. BUT my daughter will also get an inheritance from her father, if he has one to give.
I do think it’s important to discuss this with the kids before you die. Don’t just leave it as a big surprise when the time comes. Take a moment to explain to everyone why you’ve decided it the way you did. Hopefully you can reduce some of the fighting if you can explain yourself.
I don’t feel that simply because the one son worked “in the business” that he should be entitled to the lions share of the business in the end. WHAT did he really contribute to build it? His own money and additional time? Or was he employed like anybody else would have been and received / taken money from the business???? Sometimes parents consider presence as being “contributing” or to help build. Unequal distribution always taints the legacy of the ones leaving the will towards not only the slighted children but grandchildren too. If you really want to punch the other children in the gut just go ahead and divide it unequally.