Most parents want to leave equal inheritances to their children — but a few major factors can shift that math. Drug addiction is one common reason for uneven bequests, says Richard Durso, director of financial planning at RTD Financial Advisors in Philadelphia.
He recalls one client couple whose son had a cocaine problem. “They told him that he would be out of the inheritance if he wasn’t clean,” Durso says. “The trust they drew up said that if the son was clean every month, he was entitled to the trust income and to some principal withdrawal rights.” (Other siblings also inherited through trusts, but with much more liberal terms.)
Another couple, says Durso, cut a heroin-addicted adult child out of their estate entirely. “They thought, ‘If we do let him inherit, he’ll buy a lot of heroin and use it right away, and he’ll die — and that will be our fault, in a way,’?” Durso says. “It was a brutal meeting to be at.”
POTENTIAL BLOWUPS
Of course, in most families, the split is an equal one, giving adult siblings no reason to quibble over the disposition of cash and other assets. Yet some parents decide to single out one or more children for a bigger, smaller or differently structured inheritance.
Even if the reasoning is valid — perhaps one child has special needs, or offered the parents much more care than other siblings did — the resulting powder keg can put financial advisors in a tricky position. Handled poorly, unequal inheritances can poison the relationship between parents and children while all are still living and can wreck sibling relationships after the parents are gone.
The challenge for planners is to help families create estate plans that reflect the parents’ wishes and handle those plans in ways that don’t fracture relationships.
Even when a child has special needs that are widely acknowledged, planners must craft solutions that effectively protect the assets to be inherited.
Mo Vidwans, a planner in Saline, Mich., has a client with two daughters; one is legally blind, cannot drive and may not be able to continue working long term. “She needs more help, so the parents will create a trust and make sure there is enough money in it to support her,” he says.
“Parents say, ‘I want to take care of the person who will never take care of himself,’?” Vidwans says. The other daughter agrees that this is the right plan, he adds — even though it means she will inherit less.
Other reasons for unequal treatment may include rewards for a child who has spent considerable time and effort looking after the parents. And about 70% of clients who have already given money to one child, but not to others, wind up deducting the amount from the total estate, estimates Theresa Harezlak, a planner at Savant Capital Management in Rockford, Ill.
Vivian Honeycutt, a planner in Chesapeake, Va., has had clients use estate planning to even things out between children. “A client of mine had two sons and had helped one of them quite a bit with a house down payment and private nursery school for a grandchild,” Honeycutt says. “The other son was more independent. She wanted the inheritance split equally, so she took her assets and subtracted what she had already given the first son.”
Alternatively, the client could have started giving money to the other son, but she worried that she might not live long enough to reach an equal split.
Some parents use an inheritance to even out the financial situations children have created for themselves. One family that works with Durso has one child who is very successful in business, and another who is a social worker. After the family talked, Durso says, “The wealthier child agreed to help the sibling. … Everyone was happy and on the same page.”
An uneven split can even benefit children whose individual wealth has already created estate tax problems for their own heirs. But such “rebalancing” can be shaky ground, making a wealthier child feel undervalued.
“Maybe the lower earner didn’t work as hard or take as much initiative,” Honeycutt says. She adds that some kind of parental recognition is important to most heirs.
In fact, sometimes it’s the child who would receive more who asks parents to reconsider, Vidwans says. “I had one client who changed his mind because the heir said no, I don’t want this money, I have enough, and if you leave it unequally, you will mess up our sibling relationships for the rest of our lives.”
TRUST OR WILL?
Parents who plan to leave unequal inheritances must choose what sort of instrument to use — and not all clients will be willing to shoulder the expense and hassle of creating a trust. “You might not want a trust because it’s more complicated during your lifetime,” says Marya Robben, an estate planning attorney at Lindquist & Vennum in Minneapolis. “You have to transfer your assets into that trust.”
Some people also feel that creating a trust makes them look overly defensive about their intentions, Robben says.
Yet despite the hassle and expense, there are significant reasons to use a trust instead of a will — particularly when a client plans to leave assets unequally. Trusts completely sidestep probate, and (unlike wills) they are not available for public inspection.
That makes them more difficult to challenge, Robben says. When an executor files a will with the county clerk, “that person has already started the court proceeding — and all the disgruntled child has to do is object,” she says. With a trust, however, “the unhappy child has to go through the motions [to find] a lawyer, pay fees and figure out how to start a challenge. You need initiative and upfront money.”
A challenger also needs information about the trust — information that isn’t nearly as available as it would be in a will.
“The creators of the trust get to say who has an interest in the trust,” Robben says. “If I want to completely disinherit child No. 2, I don’t make him a beneficiary of the trust. He’ll talk to the lawyer and the planner, who may tell him that nothing was left to him. Depending on how the trust is drafted and depending on state laws, he may not be able to see the trust documents.”
Parents could still leave some assets to children who are not trust beneficiaries — either through a will or by making them the beneficiary of an insurance policy or a bank or brokerage account, Robben says.
An estate plan that creates separate trusts to separate children’s inherited assets at the parent’s death can help instill family harmony, even if the inherited amounts are identical, she adds.
“Once the funds are separated, brother and sister no longer have the right to look into each other’s piggy banks,” she says. “Both siblings have a right to know how much the trust started with, but long term they won’t know what’s happening with each other’s money. That disentangles people going forward.”
Trusts may also avoid the issues of competency that can dog a will, Vidwans adds. “The most common scenario for challenging a will is undue influence or incompetence,” he says. “With a trust, we assume that the person was not under undue influence or incompetent, because it’s [usually] done many years before the person dies.”
WHO’S THE TRUSTEE?
One key issue to address with clients: naming a trustee. When parents leave a smaller sum in trust to a child with substance abuse or financial problems, they often consider asking a less troubled sibling to serve as a trustee.
That has some advantages, says Honeycutt. She has a client with two sons; one is in his 40s and has “major drug issues,” she says. “That child will have a trust administered by his brother. If he gets clean, his brother is going to know, and the brother has the discretion to pay out what he thinks is appropriate. He has complete discretion and control.”
What the addicted child doesn’t use will go to his children — a solution that the parents hope will even out the sums their grandchildren ultimately receive.
Yet other professionals advise against making a sibling a trustee, warning that family members may be too emotionally conflicted to serve well.
“A sibling is a sibling, not a parent — and putting them in a supervisory, authoritative role blurs that line,” Robben says. “The healthy child already has issues around the sibling’s illness. Adding to that isn’t helpful. There are plenty of great corporate trustees and then the sibling can stay a sibling, not a financial controller. You also don’t want to put a ton of guilt on the healthy sibling if there’s a bad outcome.”
If a sibling serves as trustee for a disabled person, that’s easier, Harezlak says. Still, “the parents really need to have a conversation with that child to find out if they are willing and ready to take that big responsibility,” she says.
DISCLOSURE QUESTIONS
Many planners say that whenever inheritances will be unequal, parents should tell children in advance.
“The majority of disgruntlement comes from the surprise element,” Vidwans says. “If the person who is bequeathing the estate explains the arrangement nicely but firmly, 99% of children tend to understand and accept it. The reason is more important than the money; they need to know why mom and dad are doing this.”
Robben also suggests that clients talk to their children about what they’re doing and why. “It’s a hard conversation, and I’m not saying it won’t be tense,” says Robben. “It helps children continue to have a relationship and not challenge the will or trust when parents can say, ‘We love and respect you, and we want you to know that your sibling didn’t unduly influence us.’?”
Having a professional present can make meetings less emotional, she says.
PERMANENT RIFT
Estate plans can change, however — which is why some advisors argue that there is little point in creating tension around something that may never happen.
Rob Siegmann, an advisor and COO at Financial Management Group in Cincinnati, has clients whose adult child’s marriage created a permanent rift. “There was a marriage that took place that was not approved by the parents, and there was never reconciliation,” he says. Instead of leaving that child an inheritance, the parents decided to leave a small bequest to his stepchildren.
But the clients have not told any of their three children of their plans — in part because they keep shifting them. “The situation has changed a couple of times,” Siegmann says. “At one point it was completely equal, and at another time it was 50-50 between the two non-estranged children. The estranged parties could still make up.”
And even clear disclosure can’t always prevent a rift. When a client who works with William Carrington — a planner based in Arlington, Va. — wanted to leave her home to her natural child and smaller amounts to her two stepchildren, she told all three daughters. “She underestimated the reaction,” says Carrington, who adds that he had recommended against it. “It split the family.
“She had raised her stepdaughters since they were 12, and they were very close,” he adds. “She assumed that, because one stepdaughter had married into wealth and could care for the other, ... that evened it out.”
After the disclosure, the client offered to redo the plan, putting the house in trust for all three children — but even that was contentious. “They wanted an irrevocable trust, and you can’t have someone put her only asset into an irrevocable trust,” Carrington says. “She might need to liquidate it to pay for her own care someday.”
Now the house is in a revocable trust for the natural daughter and the middle-class stepdaughter. The wealthier sister refuses to reconcile with her stepmother, Carrington says — but “if they reconcile, she could add the wealthy daughter.”
Ingrid Case, a Financial Planning contributing writer in Minneapolis, is a former editor at Bloomberg News and author of Your Own Two Feet (and How to Stand on Them): Surviving and Thriving After Graduation.
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