Treating Children Fairly Does Not Necessarily Mean Equally

As parents, we generally try to treat our children fairly. Unfortunately, we often assume that fairness means leaving an equal inheritance to each child. However, “fair” does not always mean “equal.” A thoughtful estate plan considers each child’s unique circumstances to create distributions that truly support their needs.

Here are some situations where unequal but fair distributions might be the right choice:

• One child has a high-paying career while another struggles financially. You may want to provide more financial support to the child who truly needs it.

• One child may have sacrificed their own time and energy to become your primary caregiver. It may be fair to compensate them for the care they have provided.

• You have children with different needs, for example, a young child who still needs care for many years or a child with special needs who will require lifelong support.

• You have one child who wants to take over the family business. You can leave the business to that child instead of making all your children equal owners, which can cause conflict, and use other assets (such as a home, an investment account, or a life insurance policy) to provide a fair inheritance for your other children.

  
  

When and How Your Children Receive Their Inheritance

Inheritance planning is not just about how much each child gets but also about when and how they receive their inheritance. These decisions can be different for each of your children, and they are something you should carefully consider.

• Lump sums. For older children with a proven track record of responsibly managing their finances, a lump sum may be the right choice. They can use the money to pay off a mortgage or enjoy retirement.

• Installments. For younger adult children, you could consider distributing the inheritance in installments at certain ages (e.g., one-third at age 30, one-half of the remaining balance at age 35, and the rest at age 40). This distribution plan allows them to learn how to manage a significant amount of money without the risk of losing it all at once.

• Support for major life events. You can also provide partial distributions to help a child during a major life event, such as making a down payment on a home or starting a new business, reserving the rest of their inheritance to be distributed later or for different purposes.

• Third-party discretion. If you have a child who struggles with managing their money, selecting a third-party trustee to oversee their inheritance may be wise. The trustee can manage the funds and distribute them at their own discretion. This type of distribution structure can also provide protection from your child’s creditors, divorcing spouses, or predators.

• Special instructions for special needs beneficiaries. If you have a child with special needs who may require means-based government benefits, it is crucial to structure their inheritance so as not to disqualify them from or make them ineligible to receive important government aid.

The Power of a Trust

A trust is a powerful tool many parents use to protect their children’s inheritances. Accounts and property held in a trust can be safeguarded from the following risks:

• Irresponsible spending. If a child lacks money management skills, a trustee can manage the funds and make distributions over time, preventing the child from blowing through their inheritance too quickly.

• Divorce. In many states, money and property held in a trust can be protected from a child’s divorce settlement.

• Creditors and lawsuits. Depending on its terms, a trust can shield the inheritance from a child’s creditors or any future lawsuits.

Lifetime Gifts: The Joy of Giving Now

If you have the financial means, consider giving your children some of their inheritance now. The benefit is twofold. First, you get to see the direct impact of your generosity, whether it is helping a child buy their first home, start a new business, or pay for your grandchildren’s college education. Second, depending on the strategy used, gifting may reduce the size of your taxable estate and potentially lower the amount of estate taxes owed at your death.

Remember Other Beneficiaries

While your children may be your top priority, you do not have to leave everything to them. Many parents feel a balance is best: leaving their children enough to be supported but not so much that they come to rely on their inheritance and fail to make anything of themselves. If you have a sizable estate (the value of everything you own is in the millions), you might consider using it to create a lasting legacy, including setting up trusts for your grandchildren and future generations or making contributions to charitable, educational, or religious organizations you care about and want to support.

Let Us Start the Conversation

Thinking through these decisions can feel overwhelming, but you do not have to do it alone. We can help you navigate these important choices and create a plan that is right for your unique family. Call us today at 301.892.2713 or click here to schedule a complimentary Estate Planning Discovery Session to schedule a consultation and begin protecting your family’s legacy.

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This article is for educational purposes only and should not be considered legal advice.