It’s not often that a popular television series highlights the importance of estate planning, but the Netflix series “The House of Guinness” does that. It might make some people reconsider whether to use a widespread method of distributing an estate.
Even before the series, more parents were reconsidering the conventional wisdom about how to distribute their estates.
In the fictional telling of the story of a real family and business, the Guinness family patriarch left the brewing business equally to his two sons and stated that if either son left the business or tried to sell his interest, his entire inheritance would be revoked. Neither son wanted that outcome, so they both stayed in the business. The series shows some disadvantages of an equal estate distribution that forces siblings to work together.
Long ago, estates almost always were inherited mostly by the oldest male child with relatively small portions left to the other children.
Changing social norms deemed that to be unfair to female children and younger male children. Equal inheritances among all children became the new standard.
It’s not unusual for the estate distribution to be considered the parents’ final statement of how they feel about their children. An unequal distribution can lead to hurt feelings toward the parents and the other siblings. At times, it leads to lawsuits among the children.
Yet, many estate owners resist equal distributions because they know their children are not equally responsible, do not have equal prospects or talents, are not equally successful, and probably received different levels of help from their parents over the years.
More parents, especially those of valuable estates, question whether equal distributions are the right course and don’t feel obligated to distribute their estates equally.
Should an adult child who has done well financially receive the same inheritance as a child who earned less money? Does it matter if the lower-earning child worked hard and is responsible but was drawn to a career that pays less?
Should a child who is known to be irresponsible with money or has substance abuse problems receive less or even nothing?
Because of these and other issues, some estate planners say about one-third of parents now are dividing their estates unequally among their children.
Estate planners have a mantra that the three ways of dividing an estate are fairly, equally, or equitably.
An estate owner can use one way or a combination of the three to divide the estate. Here’s a hypothetical example that uses all three methods.
The parents decide they will provide each child as much education as he or she chooses, even through graduate or professional school. The child can select the schools.
If a child chose a trade school, a community college or an apprenticeship, Max and Rosie would provide the necessary support.
This is known as the “fair” allocation of wealth. Each child had the same opportunity and was able to maximize his or her own talents and interests, though a different amount is likely to be spent on each.
The parents can decide the fair distribution principle will apply only to education. Or they can expand the support to the extent they can afford to, such as help with first homes, business start-ups, travel, medical care, and childcare.
Usually, the offer of fair distribution gifts applies only during the parents’ lifetimes or their working years.
Also, there might be a dollar limit based on the parents’ resources. There also could be a use-it-or-lose-it deadline, such as requiring the education or first-home spending to be concluded by the time each child reaches a certain age.
After the fair allocations, Max and Rose then divide their final estate into two portions, which usually aren’t equal.
One portion of the estate is for equitable giving. They will make special bequests to people the Profits believe helped them or others in life or earned the bequests in some other way.
Some business owners make equitable distributions to key employees or to all employees. A child who helped build the business more than the others might receive an equitable distribution.
Children also might receive an equitable distribution if they helped care for an ailing parent or grandparent or made some other extra contribution to the family or the community that the parents believe merits the distribution.
An equitable distribution often is a cash payment. But it can be the bequest of a particular piece of property, a personal item or a share of a business. The appropriate form often depends on the reason for the bequest.
The rest of the estate is split equally among the children. That doesn’t mean each child has equal joint ownership of each asset. It means that each receives approximately equal value from the estate.
The blended distribution approach can make sense because each type of bequest has a different purpose.
The fairness gifts are primarily to motivate the children and give them opportunities early in life. The equitable gifts are to reward people, whether they are children, grandchildren or have other relationships with the estate owner. The equal gifts are to increase financial security for the children and perhaps their children.
An alternative that appears to be widely used is to determine that during the parents’ lifetimes each child will receive fair allocation gifts to the extent the parents can afford them.
Each child will receive an equal distribution of the estate. But the value of the fair allocation gifts will be subtracted from each child’s share. A child who received more support while the parents were alive will receive less from the estate. Some families use this method only for gifts made after a child graduates from college or turns 21.
Deciding how to allocate the estate using one or more of those methods is the first step of planning. Instead of automatically opting for equal distributions, consider the alternatives.
To avoid causing or worsening problems among the children, however, the plan must be transparent.
The children and any other heirs need to be informed of the plan early. There must be regular communication and education about the plan, what each child is likely to inherit and when it will be received.
The best estate plan on paper doesn’t work if the children learn about the assets and plan only when it is final and the reasons for it aren’t clear.
One purpose of communication is so each child knows the plan and the thinking behind it. They must know why the siblings might not receive the same amounts over their lifetimes. Knowing the plan also can influence a child’s decisions during life.
When there’s no transparency, it is very likely that one or more children will feel they were slighted, left out or loved less.
In many cases, this leads to hard feelings among the children. In extreme cases, it leads to litigation over the estate. A child who receives less might sue the others, alleging undue influence, fraud or other claims. Then, much of the estate is likely to be paid to lawyers instead of the children and other intended beneficiaries.
Another reason for transparency is so the children can prepare.
Some children might not receive as much of an inheritance as they expected. Their long-term financial plans assumed the larger inheritance. They will have less financial security than they would have if they had known the inheritance would be less and planned accordingly.
Other children need to prepare to handle the inheritance. Often, it is the most money they will receive at one time and might exceed what they accumulated and managed on their own.
They need to have a plan for handling it. Otherwise, a portion of the inheritance is likely to be lost through mismanagement, fraud or other means.
Some parents opt to leave money in trusts for at least a few years. A trustee manages and distributes the money until a time when the parents believed the child would be prepared to manage it.
When money is left in trust, explain the reasons why. Sometimes the trust beneficiary treats the imposition of the trust as a slight or criticism instead of appreciating.
Communications should be in person. Each affected family member should have the opportunity to hear the plan and the reasons for it. Each also should be able to ask questions and voice any objections.
A goal of estate planning usually is to ensure the wealth you accumulated, however much or little, improves the lives of at least one more generation of your family. You also would like the wealth transfer to increase family unity and harmony.
Keys to achieving those goals are deciding how to distribute the estate and communicating that decision to family members.