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Should an inheritance be fair or equal?

We often hear clients say they want to be fair to all of their children and grandchildren. For some, the fairest approach is to leave equal shares to all beneficiaries. Others might approach fairness from the opposite perspective—that tailoring the inheritance to the recipient is preferable to simply divvying everything up equally.

In this article, we’ll look at what goes into creating a “fair but not equal” estate plan, including how you might want to prepare your family in advance.

Why might a parent leave everything to one child?

Some of the more common reasons for creating an ‘unequal’ estate plan include:

Blended Families
When spouses bring children from previous marriage(s) into a new marriage, it’s common to see nontraditional estate planning. Even if you view your stepchild(ren) as your own, you might treat them differently from a financial perspective. For example, if your spouse’s ex is very wealthy and intends to provide for your stepchildren, you might disinherit them from your estate knowing they’re taken care of elsewhere.

Age Gaps

If your children span a wide range of ages, you might end up with adult children and minor dependents at the same time. If your adult children are established with successful careers, you might leave everything to your minor child, at least until they reach maturity. If your adult child is still struggling with student loans and relying on you for support, however, this may not be a fair approach.

Special Needs

If you have a relative with special needs, or any medical condition that requires long-term care, you may choose to focus your estate plan on providing them with ongoing financial support after you die. This is especially true if the beneficiary cannot adequately provide for themselves without assistance. In some instances, you may need to create a special needs trust or take additional steps to ensure your heir is protected.

As you can see in these examples, there’s a certain amount of subjectivity involved in what might be considered fair—and that using a one-size-inheritance-for-all approach to estate planning might be less fair than it appears on the surface.

What’s fair to you?

To determine what makes the most sense for your estate plan, think about what fair means to you. It can be helpful to consider how you’ve supported your potential beneficiaries in the past and their current circumstances, as well as any long-term or future considerations that might be relevant.

For example: If you spent significantly more money supporting your eldest child—paying for four years at a private college and four years of medical school after that—you might consider your financial obligation met. You might leave everything to your younger child, who attended a state school and works as a public-school teacher.

You might also decide to divide your estate by asset type. For instance, you might leave everything investment-related to one child, real estate to another, and your collection of jewelry and antique cars to a third. Keep in mind that there’s more to an inheritance than the property in an estate plan. For instance, if one child is the designated beneficiary on your life insurance policy, you might want to adjust their share of the estate they’re set to receive to offset that benefit.

Communication: The path to fairness

It’s also important to consider the tax implications of what you leave your heirs and how. If you leave a traditional IRA with $100,000 in assets to your son, and a Roth IRA with $100,000 in assets to your daughter, your daughter is getting the better deal since her future withdrawals won’t be subject to the federal income tax that your son will need to pay.

Finally, think about the sentimental and emotional components of how you divide your estate. It’s possible one or more of your beneficiaries would be open to receiving a smaller share of your estate if what they receive holds sentimental value.

Ultimately, the best way to ensure you divide your estate fairly is to have a conversation with the people you’re leaving it to.

Ask what they think is fair. If you choose to do something different, explain how you came to that decision. If your beneficiaries understand your thought process, they may be less likely to contest your wishes after the fact.

Create a fair estate plan

Aside from talking to your heirs about how you plan to divide your estate, the two most important things you can do to safeguard your wishes are:

  1. Work with a trusted, knowledgeable attorney who specializes in estate planning. Remember, estate planning is handled by state, so make sure the attorney is based where you are. It’s best if you can document you are of sound mind and not under any external pressure when drafting anything potentially contentious.
  2. Don’t rely on a will alone—use trusts. Trusts can be designed with more specialized criteria built in. For instance, you can stipulate that a beneficiary won’t receive their inheritance until they turn 25 or that they must use the funds for education. Trusts can also help mitigate some of the tax concerns involved in building an estate plan.  Plus, spendthrift provisions can help prevent your heirs from borrowing against their inheritance and protect the assets from creditors.

An estate planning attorney and financial advisor can work together to walk you through your options and help you build an estate plan customized to your family’s unique circumstances. Regardless of what you decide is fair for your family, engaging in regular, open conversations about your plans and intentions can help ensure a smooth transfer of assets, whether you leave everything to one child or a little bit to everyone.

Are you in the process of updating your estate plan? Set up a meeting with a Bogart Wealth Advisor to learn how we may be able to help.

IMPORTANT DISCLOSURE INFORMATION:
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level (s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at bogartwealth.com


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