Tips for being fair—not equal—with your heirs

Transferring wealth means planning carefully, with each person’s needs in mind.

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Key takeaways

  • While it might seem logical that you'll divide your estate equally between your heirs, there are many reasons that might not be the optimal plan for your situation or your family.
  • For assets that can't be easily split, such as a house or a business, you may want to consider ways to factor in your heirs' attachment to or interest in the assets.
  • Using tools, such as trusts, can help you achieve your goals, but perhaps the most important action you can take is to communicate your intentions beforehand.

As their grown children navigated adulthood with varying degrees of success, a retired couple in New Jersey faced difficult choices about their estate. While the older daughter and her spouse were high-earning professionals, the younger had struggled through disappointing jobs and a painful divorce. The couple feared that, should they pass away, the younger daughter might use up her inheritance and be left financially insecure.

"They wanted an estate plan that could accommodate both their daughters' different lives without appearing to pass judgment," says Tamara Costa, vice president of advanced planning at Fidelity.

While it might seem like dividing your estate perfectly evenly is the most fair or "right" approach, the fact is that the world is more complicated than that. Sometimes the individuals involved or their circumstances demand a more tailored solution. "Each child is unique," Costa says. "A cookie-cutter approach that simply divides the assets could lead to discord or failure to fulfill the parents' intentions."

Another issue that can arise is when you wish to leave assets that are difficult or impossible to divide, like a beloved family vacation house, a family business, or an art collection. There you encounter not only the challenge of dividing something that maybe doesn't come apart in even halves, but also the potential for different attachment to or interest in the particular asset.

Here are a few common scenarios that you might encounter and ways you could address them.

Children with different needs

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There may be times when an unequal division of assets makes sense. For example, one child has a disability requiring lifelong care. In that case, parents might leave some of their estate directly to the other children while using a proportionately larger share to establish a special needs trust.

But in a scenario where the heirs have different life circumstances or capabilities in managing money, it may make sense to consider a solution where the amount of assets each heir receives is similar or identical, but there are specific plans tailored to each individual.

For example, for the aforementioned New Jersey couple, the couple established separate trusts for the 2 daughters, naming a corporate trustee for each. The younger daughter's trust was set up to provide regular distributions for living expenses, while protecting the principal for many years to come.

While the older daughter could have served as her own trustee or even managed a lump-sum inheritance, the couple created a similar trust for her to avoid appearances of favoritism. However, instead of providing regular distributions she doesn't need, this one was structured as a generation-skipping trust, enabling the assets to eventually pass to her kids (the couple's grandchildren) without passing through the daughter's taxable estate. "While the trusts are similar in asset size, they achieve very different goals," Costa explains.

Difficult-to-divide assets

Even if you wanted to split everything equally, some assets, such as a family home or vacation property, an art collection, or heirlooms, simply won't divide into neat portions. In some situations the easiest solution might be to sell the assets and divide any proceeds among the heirs. But there are times when some of the heirs might be more attached to the actual asset than the money they'd gain from a sale—while others might not feel the same.

Costa recalls one couple whose several grown children continue to gather for holidays and vacations at the family homestead in Pennsylvania. The parents, now living in Florida, had planned to leave the home in their estate, with equal shares to all of the kids. But conversations with their children revealed that while some wanted to maintain the tradition after their parents were gone, others were happy with just the existing memories. Costa is helping the couple work through various solutions. One potential scenario under consideration, with many details still to be ironed out: The couple could bequeath the home to a trust, along with sufficient money to pay for taxes and maintenance for the foreseeable future. Any heirs interested in the home could potentially divide ownership while others receive a higher share of the parents' liquid assets.

Preserving a family business

Few assets are more likely to touch emotions than a family business—especially if some heirs want to keep it going while others don't, or in some cases if one or more heirs is involved in actually running the business while others are not. But what if distributing cash from the enterprise to those interested in other pursuits, which could seem like a viable solution, might sap vital operating capital from the business?

There are options. As a compromise, you could recapitalize the business, creating voting and non-voting shares, Costa suggests. Those interested in preserving or continuing to stay involved with the company would have voting rights on key business decisions, plus additional compensation. Other family members would be free to pursue other interests while still benefiting financially from the company.

Communicating your intentions

Regardless of the specific issue you face and the solution you're leaning toward, share your thoughts with loved ones, Costa advises. "A family conversation is really critical, giving everyone a chance to hear your intentions, ask questions, and raise concerns." That doesn't mean the kids get to rewrite your plans, she adds. And there's no guarantee everyone will be happy. "But you can use what they say now to resolve conflicts before it's too late," she says. "Making a plan in silence and letting your heirs hash things out later could be a recipe for disaster."

Working with a team

Don't assume that an estate plan, once formed, is set in stone. "We suggest revisiting your plan every 3 to 5 years, and when tax laws change or there's a significant family event, such as a marriage, a birth, or a death," Costa says.

Such deliberations are by nature sensitive and often complex. A financial professional can help facilitate family meetings as a caring but neutral party, and will have an understanding of whether trusts or other available solutions could also be helpful. Regardless, it's important to work with your attorney, tax professional, and other specialists to make sure your estate goals work smoothly in the context of your overall financial needs.

Next steps to consider

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