There are many factors that can influence how we decide to distribute our assets to heirs after our death. Most of the time, a large portion of our estate is left to our closest family members, including a spouse and children. However, determining exactly what we leave to those family members can be challenging especially when we consider the many additional factors that can be important in this part of the process.
When Equal Isn’t Necessarily Fair
Many individuals seek to make the asset distribution process easier by simply dividing assets among their heirs equally. However, depending on the personal dynamics of your family, that may not be the wisest choice. The following example, adapted from a recent article from Forbes, helps highlight this type of situation.
Imagine you have two children of different ages, one 25 and one 13. Your 25-year-old has graduated from college and has begun to work at a new job in what looks to be a promising career. In addition, let’s say that you helped shoulder much of the cost for the oldest child’s college education. While there is certainly no way for you to predict the future, your youngest child is not even necessarily old enough to consider college let alone begin a career. When you die, you have an estate worth $1 million and no spouse. You choose to divide your assets equally between your two children, so each will receive $500,000. In this case, your equally divided assets will have far greater benefit for your oldest child who will not need to use any of their inheritance for educational purposes. Your youngest child will not have you to help shoulder the cost of a college education and will likely need to use a large portion of their inheritance to do so. While both children will certainly be provided for equally, their shares of inheritance won’t necessarily be as fair as you may have intended.
In the scenario above, you likely intended to distribute your estate equally among your children. However, one child will need to use a large portion of their inheritance to pay for educational experiences that you were able to cover for the other child during your lifetime. That may leave them with a significantly smaller portion of your estate than you had originally planned.
However, you can avoid the problem by creating a trust or even several different trusts. You can put a portion of your estate aside to help pay for your youngest child’s educational costs when or if the time arises, with mechanisms preserving the money for equal distribution should your child opt not to attend college. You could also create a trust that distributes your estate at a certain age when both children have completed college so that the distribution is fair and they can use it in a way they see fit. You may also be able to create a trust where your child becomes the trustee at a certain point and then has the power to make distributions from the trust to themselves, which can help avoid issues with the estate tax should any be a concern for you. You can even design some trusts to be protected in case your children marry and divorce.
Ultimately, only you can decide what is actually fair given your personal situation. However, bringing your goals and concerns to an experienced estate planning attorney can help that attorney provide you with various options that can help fulfill your wishes when it comes to asset distribution.