Personal legacy planningFamily inheritance: Does fair mean equal?

“That’s not fair,” is a common refrain that nearly all parents, often with squabbling toddlers or adolescents, have likely heard in their lifetimes. While that phrase is typically associated with young children, this basic instinct may not completely fade with age. The issue can become more visible as you embark on inheritance planning and try to determine ways to fairly distribute assets in your estate.

Many families who have significant assets to pass on later in life or at death may think that being “fair and equal” in the treatment of family inheritance is an easy process. However, estates can be complex, and trying to establish a “fair” distribution of assets may not always result in “equal” distribution for all beneficiaries.

According to Tom Thiegs, senior leadership and legacy consultant for Ascent Private Capital Management of U.S. Bank, any number of variables can impact estate distribution decisions. “In reality, different people have different needs. We focus on trying to help families find ways to treat each beneficiary equally – but that may not always be fair.”

Reflecting life’s complexities in inheritance planning

For many families, a variety of factors can impact how gifts or assets are distributed to beneficiaries. It isn’t as simple as divvying up one pot of money.

“You may have businesses, significant real property or personal property to consider – the types of assets that are more difficult to divide in an equal manner,” says Thiegs. “Finding ways to divide such property as fairly and equitably as possible may require some creative thinking.”

A perfect example is a family vacation home. It might be the intention of parents to leave the home to their children. However, one child may live relatively close to the property and have easy access to it while another lives across the country or even out of the country. “In a situation like this, different assets could be directed to the child who lives a long distance away,” says Thiegs. “Another option would be to give that child access to the property at a premium time of year, such as during a holiday season.” This is an example of the extra thought and creativity that often needs to go into the estate planning process to try to achieve a sense of fairness.

Gifting challenges

Parents may decide they want to help children financially during their lifetimes. If multiple kids are involved, fairness becomes a bigger concern. “Families have the best of intentions, but often treat their adult children different in regard to gifts,” says Thiegs. For example, a parent may loan money to an adult child for a down payment on a home, but ultimately forgive that loan. Another child who was determined to “make it” without financial help from their parents may feel slighted by this arrangement. “You may actually want to establish a loan or investment policy that outlines what resources are available to family members,” he continues.

“In reality, different people have different needs. We focus on trying to help families find ways to treat each beneficiary equally – but that may not always be fair.”

- Tom Thiegs, senior leadership and legacy consultant, Ascent Private Capital Management

In other situations, parents may own a property, such as a vacation home, that one child would like to inherit. “The home could be worth a lot of money, so if one child primarily benefits, others may be compensated, in terms of gift or estate considerations, with something else,” Thiegs says. If such a property is gifted to one or even multiple children, Thiegs adds that parents should be confident children are interested in retaining the property.

The value of prenuptial agreements for blended families

Significant tensions and animosity can easily occur when families are combined through a second (or later) marriage and children are involved. Children who come from a first marriage may have certain expectations of what will be left to them. But parents may alter their plans if they re-marry, particularly if the new spouse already has children, or the newly married couple decides to have additional children together.

In the throes of a budding, later-in-life romance, the idea of signing paperwork before marriage may seem unsentimental to many. However, there are several practical reasons for couples to “put it on paper” in order to sidetrack potential disputes down the road.

Prenuptial agreements are particularly beneficial in certain situations. One is when there is one spouse who comes into the marriage with significant assets while the other has few. Another is when a family business, particularly one that has been around for multiple generations, is controlled at least in part by one of the parties.

“Don’t expect to marry into a family and assume that you suddenly have ownership rights to their long-held business,” says Thiegs. “Fair is not equal and equal is not fair when it comes to marrying into a family with a business.” Yet Thiegs also emphasizes that when a person marries into a family of wealth or one that owns a business, “their role really matters, and they need to be treated fairly.” That may require some creative ways of setting up ownership of assets and other technical matters. “Treating new family members with respect is vital, even if lines are often drawn where blood lines end,” says Thiegs.

“Having a conversation on this matter is key,” he adds. “Expectations need to be managed, and possibly revised, when one or more parent’s marital status changes.” He notes that these situations can easily get complicated and that clear family discussions are critical.

Dialogue and planning are critical

It isn’t always possible to treat your estate beneficiaries in a way that seems perfectly fair or equal, but sometimes being thoughtful can help you come closer to that goal. Consider writing a legacy letter for your heirs that expresses your hopes, dreams and intentions for them.

Ultimately, you want understanding from all family members on how assets will be distributed either while living or after your death. Family dialogue and guidance from professionals can help you develop a strategy that meets expectations for all affected parties.

Learn how Ascent Private Capital Management can help you shape, and share, your family’s legacy.