People typically divide their assets equally among their children. However, there are many situations where this kind of simple math puts heirs on unequal footing.
Equal inheritances are not always fair inheritances. Consider what happens if a parent dies while one child has completed an extremely expensive education and the other child has not yet attended college. This is the scenario presented in an article in Forbes.
Forbes’ article, “Where Inheritance Is Concerned, Equal May Not Always Mean Fair,” asks you to consider a scenario in which you died with two children, a 25-year-old daughter and 16-year-old son. The older daughter is a recent college graduate for whom you paid all of those expenses amounting to $250,000. At death, you had assets of $1 million. If your estate plan provided that you distribute your estate equally in a trust, then the younger son would have to pay for his college using proceeds from his portion of the Trust.
As a result, after college expenses, the son will be left with $250,000 and the daughter will have $500,000. Although you distributed your assets equally and split the estate right down the middle, you may not think equal is fair.
This same type of inequitable distribution can also happen if you own a home, business or other sizable assets.
One way to avoid the “inequality problem” is to create an irrevocable trust that holds assets that will not be divided equally until—as in the example above—both children have completed college. Another option is to elect to “never” distribute assets by designating a child as the trustee of the trust at a specific age and giving her the authority to make distributions to herself, without inheriting the entire estate and paying estate taxes.
This type of estate planning can be complicated, particularly if you try to create a trust in a vacuum and don’t plan ahead and consider variables and contingencies. It is important to speak with a qualified and experienced estate planning attorney.
An irrevocable trust lets you plan for the specific needs of your family and can provide asset protection. If you don’t have the trust distribute the assets immediately, a son who gets divorced is, in effect, given “divorce protection” from having assets in trust—even where the child is the trustee. In some circumstances, a trust can also provide protection from creditors and litigation.
It is important to clarify your overall intentions for your heirs and assets. What stage of life are your heirs in, are they able to manage money, do they need help with college or grad school costs or do you have concerns about the stability of their marriages? Once these factors are explored, you’ll be able to create an estate plan that will suit your goals, while taking into consideration the unexpected and unknown events that life brings to us all.
Reference: Forbes (February 27, 2017) “Where Inheritance Is Concerned, Equal May Not Always Mean Fair”