Creating a will is a stressful process, but there’s never a bad time to start estate planning. Whether spurred by age, circumstances, or on occasion, guilt, estate planning is a necessary life step.
One important question many parents often ask is: Should we treat our children equally when it comes to estate distributions?
On its face, splitting your assets equally among your children seems fair, which is why many parents opt for this approach by default. Intuitively, an equal split seems obvious, and in most situations, doing so makes sense. However, there are circumstances when “equal” does not make the most sense given each family’s unique dynamic.
When Unequal Inheritances are the Right Decision
What if one of your children has a special need that requires ongoing medical care, or some form of supervisory expenses? In such circumstances, you can consider establishing a special needs trust—either inter-vivos (currently) or testamentary (upon death)—so as not to interfere with the individual’s eligibility for social security or other types of financial assistance.
Another situation that could warrant unequal distributions is when adult children have not achieved the same level of financial success and earning ability. Some parents may think they are being fair by leaving more to the child with fewer resources, but this can be a tricky area in which to maneuver. As a financial advisor, I have heard more than one beneficiary ask why he or she should be penalized for being financially successful. In general, I do not recommend basing estate distributions on earnings ability, unless there are extreme income disparities. Even then, you should communicate openly with all heirs when you are drafting your estate plan.
Another situation where a discussion is appropriate is when some beneficiaries are involved with a family business, and others are not. Also, when an inheritance includes non-liquid assets, differences in liquidity and tax attributes should be factored into dispositive decisions.
Per Stirpes vs. Per Capita
In my experience, most clients chose the simplest approach, which is to distribute their estate per stirpes. This means that each branch of the family receives an equal share of the estate. This approach can be especially important when an heir dies before his or her parent. Should a child pass before the parent, his or her share would pass equally to the grandchildren.
In contrast, a per capita approach, “divided by heads,” delivers equal shares to each heir. This makes sense in theory, but in practice, it could mean that if an heir dies before his or her testator, the grandchildren would receive the same amount as their surviving aunts and uncles. Thus a per capita approach can have unintended consequences.
Per Capita by Generation
A hybrid of per stirpes and per capita is called per capita by generation.
Using this estate planning approach, the second generation would each get what was promised to them, and the heirs in the next generation would each receive an equal share of the portion that would have gone to the entire third generation, regardless of their connection to the second generation.
Estate Planning Isn’t Easy, but It’s Necessary
How you choose to give away your money after you’re gone has long-term implications. That’s why it’s important to have an open and honest discussion with all stakeholders about your estate plan. Along with your attorney, consider involving your financial advisor to address all critical estate planning issues, including naming guardians for minor children, establishing at what age children should inherit, choosing an executor and other considerations.
Family infighting is something no parent wants to leave as his or her legacy. If all heirs are on the same page well in advance of the reading of the will, there is less likelihood that bad feelings will emerge later on.