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Unequal Inheritance: Is it workable for you? How?

Unequal Inheritance: Is it workable for you? How?

| March 18, 2021

Target Audience

For highly personal, perhaps values-based or differences between children, as parent(s) you are thinking about leaving unequal inheritances to 2 or more children. And you want to do it so that there is zero, or at worse very small amount of bad feelings or conflict between your children after you both die.

Process Introduction

This post is mainly about the thought process of leaving unequal inheritances. So we're talking about families, parents, children and maybe grandchildren and / or step-children. Not about the legal or mechanical how to do it, for the most part.

Ethical Will conceptually comes first

My own definition:  You have not written an Ethical Will. You just died, but you can come back for 15 minutes. What would you say to your children? Write it, and that's your Ethical Will. Best guess is you will want to write something about values that are important to you and you hope will be important to future generations.

Yellow Pad or New word doc

A little bit of the how. An iterative ("trial & error") process. Assuming 2 parents still married to each other, each of you separately jot down on an actual or virtual (aka Word Document) yellow pad. Ideally in over-simplified form, write down what you want to do. E.g. Instead of dividing 50% - 50%, I want to divide 65% - 35%. Leave out the "why" for now. Or, you want to leave the house to someone, and the IRA to someone else. Etc. Extra credit for brevity! 

Now trade yellow pads or Word documents. After you each have read what the other wrote, discuss. If necessary, do a new Word doc or yellow pad. Each read again. Wash - rinse - repeat until you have something written down that you both are OK with.

Why Unequal Inheritances?

Explanation might help prevent conflict among children

Very important to be able to answer this question for yourselves. Ultimately, unless you and spouse have already pre-agreed to each do your own estate plan, (a separate post) it is important that you agree on the "what." But if you came to the "what" for different "whys," so be it.

No judgment. Some possible "whys."

  1. Children have vastly different actual or potential lifetime earning capacities and capabilities.
  2. One (or more) children have actual, acknowledged and understandable physical, intellectual and / or emotional challenges.
  3. Grandchildren are distributed unequally. E.g. one or more children have none. One or more do. A multi-faceted subject.
  4. Stepchildren. Also a multi-faceted issue.
  5. Equalization of pre-death gifts. One child was gifted substantial money and the goal is actually to equalize among child(ren) who received significant gift(s) and those who did not.
  6. Caregiving is / was divided unequally.
  7. Family business issues. (Mostly a separate post due to complexity)

Communication with children

Where the rubber meets the road. There is not one right answer that serves all families. There is, however, a much higher probability of achieving the desired result of low or no conflict after death if your plans and actual implementation of the unequal inheritance does not come as a surprise to any of the children. Meaning that communication of your plans to your children is, essentially, critical.

Some type of mediator and / or trusted family friend / relative or advisor, be they spiritual, financial, legal etc. is a possibility. Again, it depends on the personalities involved.  One conventional method would be to have a family meeting. This might work great in some families, but not so well in others. If individual children are going to be told separately, keeping secrets is not useful. And the child(ren) getting less hearing that plan from the child(ren) getting more is not a good idea. So some strategic / tactical planning would be in order when the communication happens.

Unintended Consequences (a bit of the "How")

Consult your estate attorney. It is possible that trust(s) can be used to address some of the issues above with the ultimate result of totally equal inheritances ... or much less unequal. One quick example might be the issue of grandchildren. Ideally there is agreement among and between the children or this idea doesn't meet the "Minimize Conflict" goal. We can hope for example that an Aunt with no children will be quite happy for her estate to go to her nieces and nephews after her death. And trusts might be useful in this regard. Similarly if one child has e.g. more (grandchildren) than another. If grandparents want all of their grandchildren to ultimately receive kinda sorta the same amount, that might be addressed with trusts. More complicated, though.

More common might be the different tax treatments of different assets. A child receiving a traditional IRA is ultimately going to have to pay income taxes on it. A child inheriting and continuing to live in the residence of parents after they die might not have to pay as much, maybe no taxes at all.

Rather than earmark specific assets, it might be better to direct the Trustee / Personal Rep to "judiciously" liquidate assets and distribute net after taxes. IRA might be special case and just divide that one equally so it can flow over time. No one good obvious answer.

Potentially positive end result

Giving an unequal inheritance plan some diligent thoughtfulness and coming up with something workable and understandable .... and .... successfully communicating it to all children is a big task but might reap meaningful rewards for future generations.