Fairly dividing your estate between children
- Providing example calculations about how financial support given during your lifetime might be taken into account when dividing your estate on death
- Identifying reasons why a strict financial calculation might not be fair and suggesting that a consensus be achieved
- noting that there are two estate planning methods for achieving equalization which will be discussed next week.
How can you divide your wealth equally between your children on death if you’ve given them different levels of financial support while alive?
Let’s assume a $1 million estate to be divided among four children: John, Paul, George and Ringo. Each would receive $250,000.00 if that is divided equally.
But you had given John $100,000.00 to help him with a down payment on his first home.
One method to account for that gift:
- add it to the $1 million estate value before doing the four-way division, and
- subtract it from John’s share.
The adjusted estate value is $1.1 million. Divided four ways is $275,000.00 each. John, who already received a $100,000.00 advance on his inheritance has that subtracted from his share and receives $175,000.00. Each of the others receives the full $275,000.00.
This works no matter how many and how varied the financial gifts have been.
For example, let’s say you had also given $200,000.00 to Paul and $80,000.00 to George.
Step one is adding all the gifts together. Adding $100,000.00 to John, $200,000.00 to Paul and $80,000.00 to George totals $380,000.00. Then you add that to the $1 million estate value for a total of $1.38 million.
Dividing $1.38 million four ways is $345,000.00 each.
Then you subtract each child’s gift from the four-way division.
The resulting inheritances are: John receiving $245,000.00, Paul receiving $145,000.00, George receiving $265,000.00, and Ringo receiving the full $345,000.00.
This might or might not seem fair depending on various factors and considerations.
Should Ringo, the most affluent child who didn’t require your financial help and has no need for an inheritance, receive the largest chunk of your estate?
And should Paul, who is the least financially secure and could really use the money in his retirement, receive the least?
There are all sorts of factors that might be considered when figuring out what’s fair. Maybe Paul’s needs had to do with a serious illness and Ringo was on easy street taking over the family business.
And what about inflation? Consider if Paul received his $200,000.00 gift 30 years before your death. Taking inflation into account, that’s over $330,000.00 in today’s dollars.
Which figure should you use when taking that gift into account?
I detest the notion that I would owe anything of an explanation to my beneficiaries about how I decide to allocate my estate. But I do want to be fair. And I would like for my children to feel that I’ve been fair to them.
One way to achieve those goals is to have a fulsome discussion with your children so that all viewpoints and factors can be explored. Ideally, a consensus would be reached.
Regardless of how you arrive at your decision, it’s important that your wishes be reflected in your estate plan.
That estate plan should not only account for past gifts but also how to account for future ones.
There are two estate planning methods of equalizing different levels of financial support given during your lifetime. One is by including a “hotchpot” type clause in your will. Another is by structuring your gifts as loans.
Next week I plan on discussing each of those two methods.
