If you've had the pleasure of raising multiple children, you understand the challenge of treating them equally, yet fairly. After your children are much older and even have families of their own, you might think the days of hearing exclamations of “that's not fair” from your kids are over. Depending on how you prepare your estate plan, you might be in for a bit of déjà vu.
If your estate plan involves distributing personal property to two or more children, your first instinct might be to treat them as equally as possible. Specifically, you might decide to leave each of them the same amount of assets, at least in terms of financial value. But in many situations, this may not be the wisest decision.
Treating your children in your estate plan as equal beneficiaries can potentially cause problems for two main reasons. First, what you view as equal treatment, your children might see as being very unfair. Second, even where equal treatment is the fairest treatment, there could be practical considerations that make equal distributions of property impractical.
Practical challenges to naming your children as equal beneficiaries
The first practical challenge relates to passing on indivisible property. For example, if you have $200,000 in cash you wanted to leave to your four children in equal amounts, each one receives $50,000. But instead of $200,000 in cash, imagine you're leaving behind the family home to all four children. This can raise a host of potential issues and questions, such as:
- What happens if one of your kids wants to sell the house, but the others don't want to (or can't) buy out the interest of the child who wants to sell?
- Can all your children afford to pay their share of the upkeep and financial costs of the home?
- Do two or more of your children want to live in the home? If so, how will they decide who gets to live there?
- A lawsuit where one child sues the others to have the home legally divided by forcing a partition.
Another practical challenge arises when property is jointly owned by your children, but your children disagree about how to use the property. A great example might be a family business, with each child getting an equal ownership interest in the business. There could be disagreement on how to run the business, for instance. If your children's bickering gets bad enough, it could run the family business into the ground due to litigation costs, mismanagement or even worse, sabotage.
It sounds like leaving tangible property to your children is inevitably going to lead to problems, but thankfully, there are things you can do to reduce the chance of problems arising.
Potential solutions to passing on indivisible property
The most straightforward option is to avoid joint ownership of a single piece of property. So instead of leaving the family home to all your children, you leave it to just one of them. Then you can leave something else for your other children, like cash or other property.
This isn't a perfect solution as it can lead to other conflicts, especially when there isn't enough property available to “compensate” the children who don't get the family home. One child might get the $200,000 home, but you don't have $600,000 in cash to distribute equally to the other three children who don't get the home.
Now all the children who don't get the home are crying foul for missing out on a significant asset in your estate plan. And even if you did have $600,000 in cash to give to your kids who aren't getting the house, perhaps one of the children getting the $200,000 in cash couldn't care less about money and just wants the family home for its sentimental value.
Another option is to add a lottery provision to your estate planning documents. A lottery provision provides for a special selection process where each child gets a chance to choose what property from the estate they want to inherit. Then the order in which the children get to pick gets randomly decided by a lottery.
A final option (likely of last resort) is to not allow any of your children to receive the property. Maybe it gets donated to a charity or given to someone outside the family. Or perhaps the property gets sold with the proceeds distributed to your children. You can also sell the property during your lifetime and avoid having to include that property in your estate plan at all.
As difficult as the practical challenges are to deal with concerning an estate plan with multiple children, they usually pale in comparison to the fairness challenges that can sometimes plague even the most thoughtful estate plan.
Equitable challenges to naming your children as equal beneficiaries
If you want your estate plan to treat your children as equally as possible, there's a good chance it could lead to one or more of your children feeling slighted due to perceived unfair treatment. The best way to explain how this might happen is to provide several hypothetical situations.
Situation 1
There are two child beneficiaries in an estate plan and their names are Bob and Mary. When the parents of Bob and Mary die, Bob is 24 years old has a college degree (paid for by his parents), and he's now working full-time in a lucrative career. Mary is 17 years old and still in high school, but she plans on going to college after she graduates. The parents' estate plan has Bob and Mary each getting $50,000.
Mary feels this plan is unfair because she'll likely have to spend at least some of the $50,000 inheritance on her college tuition. Unlike Bob, her parents won't be alive to help her pay for college.
Situation 2
John is 65 years old and prides himself on living independently. However, he's getting to a point where that's no longer possible. Despite this, he doesn't need to move into an assisted-living facility. Instead, he can continue living at home, but he'll need someone to stop by at least once a day to check on him and assist him with a few tasks.
John has three adult children, Abbey, Brandon and Charlie. They all live by themselves in the same town John lives in. Despite all three being capable of helping their father, only Charlie is willing to do so. Charlie moves in with his father to care for him for the final years of his life.
When John passes away 10 years later, the only significant asset in his estate is his home, which he lived in with Charlie. John decides to leave the home to his three children, as tenants in common, with each of them having a one-third legal interest in the home. When Charlie learns of this, he's upset, as he feels the home should have been left to him. Or at the very least, he felt he should have received a 50% interest in the home, with Abbey and Brandon each getting a 25% interest.
Situation 3
Two parents are creating an estate plan where they want to leave each of their three children $100,000 in a single lump-sum cash payment. Two of the children, Dan and Erica, make smart financial decisions and are successful in their respective professions. The third child, Fred, doesn't make the wisest financial decisions and has struggled with substance abuse problems. Fred has made half-hearted efforts to get clean but keeps on quitting any programs designed to help him.
Dan and Erica feel that Fred should get a smaller inheritance because of his poor financial decisions and the fact that any inheritance he gets will probably be spent on illegal drugs. When they find out that Fred stands to inherit the same amount of money as them, Dan and Erica become resentful, as they feel Fred is being rewarded for his poor decisions and refusal to get help for his substance abuse struggles.
Situation 4
Gwen and Harold have two children they want to include in their estate plan. They want to leave less money to one particular child because they did very well in school and got a great job that pays well. The other child is struggling financially because they decided to drop out of high school and refuses to save any money. Despite this bad decision, Gwen and Harold want to leave more money for the child who dropped out of high school and makes poor financial choices.
The financially successful child feels this is unfair because she's getting punished for working hard and being successful while her sibling is being rewarded for not doing the right things.
These four scenarios are just a sampling of what could happen when trying to treat each child as equally as possible. The following section discusses things you can do to prevent the problems or deal with them, should they arise.
Potential solutions when dealing with fairness issues
Potential solution to Situation 1
Before they pass away, the parents of Bob and Mary can create an education trust, with an amount of money placed in that trust that's equal to what Bob received for his college education. If Mary is particularly financially responsible, another possibility is for the parents to gift Mary her college tuition money while they're still alive. The drawback with this second option is that the amount of money gifted to Mary may be subject to a gift tax. Then there's the fact that Mary having all that cash in her bank accounts could make her ineligible to receive certain types of financial aid.
Potential solution to Situation 3
Fred's parents could leave his inheritance in a trust and then include an “incentive provision” in the trust. This provision creates one or more conditions that Fred must meet before he gets money from the trust.
For example, Fred may have to go into rehab and stay clean for a certain amount of time before he gets part of his inheritance. Then to get the remaining portion of his inheritance, he might need to graduate from college and get a job. Only then would Fred receive the remaining distributions from his trust and only in the amount that's equal to the income from his job. These conditions may help motivate Fred to make positive changes in his life and reduce any feelings of unfairness from Erica and Dan.
Potential solutions to Situations 2 and 4
One of the biggest mistakes parents often make when it comes to leaving behind property for their children is not explaining their reasoning for their decisions. In Situation 2, Charlie felt he should get the family home, or at least a larger legal interest in it than his siblings. But John (the father of Charlie, Brandon and Abbey) deliberately did not do this because he knew Charlie wasn't as financially well off as his siblings and would struggle to pay for the upkeep of the home.
By including Abbey and Brandon as joint owners of the home, they'd have to contribute to the property taxes and other costs associated with owning the home. John could convey these thoughts to his children before his death, or with a letter of instruction after his death. Either way, his children would understand John's reasons for his decision. Even if his children disagreed with John's thought process, they'd at least understand that it was made with the best of intentions.
In Situation 4, Gwen and Harold could write a letter of instruction explaining why they decided to give each child the same inheritance. For instance, the letter might explain that Gwen and Harold believe that any money they give to the child who dropped out of high school will be wasted, whether it's $1 or $1 million.
Assuming Harold and Gwen's predictions come true, the financially successful child doesn't need to feel guilty or obligated to provide financial assistance to their sibling because they both received the same amount of money. In other words, by providing equal inheritances to both children, Gwen and Harold are trying to protect the financially successful child who worked hard.
Other considerations when creating an estate plan for multiple heirs
Regardless of whether you're creating an estate plan that provides equal inheritances to your children, you should always take into consideration the type of property you're leaving behind. Say you have two kids, one who loves the beach and one who loves cars. It would make perfect sense to leave the beach house to your child who enjoys the beach while leaving the classic car to your child who loves cars.
In this hypothetical, the financial values of each asset are likely going to be very different. However, it makes logical sense to distribute these assets this way. Just make sure you explain your reasoning to your children to make sure they don't assume an alternative motivation for your decision.
In situations where you feel that no matter what you do, you'll have a child creating a legal headache for the rest of your children, you have a few paths to consider. First, you can subject as little of your property as possible to a will. Having a will gives the litigious child an opportunity to contest its validity. Instead, you can create one or more living trusts to distribute your property. These can also be legally challenged, but it will be more difficult for your litigious child to successfully do so.
Second, if you have a will that includes property for your children to inherit, you can include a no-contest clause. This is a provision that says an heir who challenges the will in court must forfeit whatever inheritance they were to receive in the will.
If you feel a child might cause problems no matter what your estate plan is, you can leave them a bequest that's substantial enough to motivate them not to legally challenge the will. It's important to explain your reasoning, as your other children might feel it's unfair for their litigious sibling to receive anything from your estate. But when you explain why you're doing it (to give the litigious child a reason not to sue), your other children may be more understanding of your decision.
Finally, don't forget the difference between your probate and non-probate assets. The former is property that gets passed down subject to your will. The latter is property that gets transferred after your death, without needing a will to explain who gets the property.
A common example of non-probate property is a retirement account or life insurance policy with a beneficiary. When the account holder or policyholder dies, the proceeds automatically go to the beneficiary – and a probate court doesn't get involved.
When deciding how to distribute property in your estate plan, be aware of all the property getting passed down. Imagine you want to leave the family home to your first child and the cash in your bank accounts to your second child. But who gets the money from your life insurance policy? If one of your children is the beneficiary of that life insurance policy, you might be distributing assets in a way you never expected.
Bottom line
No matter what decision you make with your estate plan, remember that there's no legal requirement for you to leave your children anything. This means that if you decide to leave them anything, you're not required to leave them a certain amount or percentage of property. Whatever decision you make, explain to your children how you came to that decision.