When Should Inheritances be Unequal?

Equal treatment of children in an estate plan is most common.  It leaves the children with positive feelings towards their parents and towards each other knowing that the parents did not show favorites.  That said, there are certain situations in which unequal treatment may be desirable or necessary.

Beneficiary with Greater Need.  Some children have an undeniably greater need that might justify a larger inheritance.  Special needs children come to mind.  Also included in this group is children with ongoing concerns such as drug or alcohol abuse problems.  In this situation, instead of an unequal division of assets, a parent might give unequal inheritances by directing the at-risk child’s inheritance into a trust while making outright distributions to the other children.

Second Marriage, Second Family.  Have you ever seen a man who is divorced with adult children marry a younger woman and start a new family?  Whereas the children from the first marriage are self-supporting adults, the children from the new marriage are minors with major financial support needs looming in the future.  Unequal inheritances make perfect sense.  Perhaps designating the younger children as beneficiaries of life insurance or qualified retirement accounts, while dividing the rest of the estate equally between both sets of children, is a solution.  The tax attributes of the different assets going to each set of children also should be considered.  For example, who should get the tax-free life insurance?

Gifts of Family Business Interests.  Gifts of interests in a family business may present challenges to the parents who are trying to balance business succession planning and a desire to treat children equally.  The parent wants to reward children working in the business with ownership interests but also knows that also giving ownership to children who are not working in the business may create sibling conflict in the future over when to take dividends out of the business.  When sufficient nonbusiness assets are available to avoid an imbalance, the equalization may be more readily achieved.  However, if the value of the business interest owned by the parents comprises a large proportion of the value of their estate assets, other solutions may be needed, such as life insurance for the children who are not actively working in the business.

Joint Assets.  Sometimes a parent titles a bank or financial account in joint names with a child.  Perhaps the parent did this to reward a child who has become a primary caregiver.  The intention is a good one.  Maybe the child will voluntarily split the account with other siblings, but maybe not.  The parent needs to be very careful when deciding whether to put a child on an account.  If it is done only as a matter of convenience instead of giving an unequal inheritance, it is often better to designate the child as agent under a power of attorney instead of putting the child on a joint account.  Joint ownership can expose the account to the child’s creditors, something mom or dad would not appreciate.

Written by Legacy Planning Law Group

Legacy Planning Law Group is dedicated to working with individuals and families to help protect the assets they have built throughout their life, and make everything simpler for families who have lost a loved one. We help thoughtful people achieve the peace of mind that comes with planning their personal legacy and passing on family harmony.