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Every parent with more than one child knows that not all kids are created equal.One child may be super responsible, the other carefree; one child may be healthy, one may have a chronic disease; your daughter has made a wonderful marriage, but your son has had children with several partners and has been divorced six times. It’s not always a happy story, but that’s real life.
And when it comes to estate planning, it’s time to think hard about what each child needs and what you’ve done for each one already.
For many families, treating all children equally is the right choice. It certainly makes things easier after there’s been a death — there are fewer hurt feelings, and it makes it simpler to divide up money or possessions that are left. But that’s not always appropriate. If you have children with vastly different needs, or vastly different agendas, your estate plan will need to take that into account.
These are seven scenarios and solutions I’ve seen over the years as an attorney specializing in estate planning:
1) One child’s wealthy, the other one’s not. If your daughter is a CEO of a public company, and your son is an artist, you may not want to leave them an equal inheritance because they have such disparate financial needs. This may not be something you choose to discuss with them. If so, write down your reasons for not leaving them an equal amount. You can do this is in your estate plan, or you can write a letter to be opened after your death that explains your reasons for doing what you did. It’s surprising how often children equate money with love. Even wealthy children can feel utterly rejected if a parent leaves them less.
2) One child is terrible at managing money. If you have a child who gambles, gets in trouble with credit cards, has never seen an investment that he could pass up or a taste for extravagant online shopping, you may not want to leave him an inheritance outright. Parents with spendthrift children have several alternatives to outright gifts. The most common way to protect a child from himself is to leave money in trust for that child. You can name a bank or other professional fiduciary to manage the money for that child or select a family friend or other relative to do so. You can set the trust up for a term of years — say until a child is 50 or 60, or for his lifetime. You can restrict the use of the money for certain things, like medical expenses not covered by insurance or college, or make trust assets available for that child’s general support. Parents often consider naming a sibling to serve as trustee for such trusts, but I always try to talk them out of it in the name of preserving family harmony.
3) One child has made several bad marriages. If you’re not enamoured with your child’s spouse, or just worry that the next one will be worse than the last, you may want to leave that child’s inheritance in trust also. In this case, the trust isn’t to protect her from financial bad judgment, but rather, romantic bad luck. Such a trust can act like a financial prenuptial agreement, segregating inherited money from the marital checkbook (and subsequent divorce proceedings). Your child may be able to serve as trustee of this kind of trust because managing money isn’t the issue. Of course, if they do serve as their own trustee, nothing prevents them from withdrawing the trust’s assets and throwing everything into the family checking account.
4) One child suffers from a chronic disease. Parents with children who may need expensive medical treatment or caregiving often grapple with how best to plan for that. Sometimes purchasing additional life insurance and naming that child as the sole beneficiary of that policy is a great way to provide one child with more money than another. If the child is a minor, though, you don’t want to name them as a beneficiary directly. Instead, you will want to create a trust in your estate plan to hold such proceeds and name that trust as the beneficiary of the policy.
5) One child is disabled. If a child requires government assistance, leaving that child an inheritance outright will disqualify him from receiving such assistance (such as medical insurance or supplemental disability payments) until he’s spent all of the money that’s left to him. Instead of leaving that child an inheritance outright, parents need to create a Special Needs Trust. Such trusts are drafted carefully to provide supplemental funds for a disabled child in a way that does not disqualify that child from needs-based government assistance.
6) One child has borrowed money from you to purchase a house, pay for school or get out of financial trouble. If you’ve made loans or gifts to your children over the years and want these loans and gifts to be treated as early inheritances, then your estate plan needs to take them into account before your remaining assets are distributed. First, you have to document these gifts and loans so that there’s no confusion after you die about what was given or owed. (You’d be surprised how often inter-family loans and gifts are forgotten.) Second, your estate plan should direct the executor or trustee to add the amount outstanding on a loan or the amount given to a child to that child’s share before the other assets are distributed. A child who received a $90,000 loan to purchase a house in 2002, for example, should have his or her share of the estate be diminished by $90,000 when the time comes to divide the rest equally among his or her siblings.
7) One child is estranged from your family. It’s sad, but it happens. Sometimes a parent really wants to disinherit a child. There’s no law against this, but if it’s what you want to do, be very sure to acknowledge this choice in your estate plan. Don’t just leave that child out. Instead, acknowledge that you have that child, then state clearly that you intend to leave them nothing for reasons known to them — that way they won’t be able to argue later that you simply forgot to mention them and that they are entitled to a share of your estate.
Liza Hanks is an attorney specializing in estate planning for families at Finch Montgomery Wright LLPin Palo Alto, Calif., and the author of The mum’s Guide to Wills & Estate Planning and co-author of The Trustee’s Legal Companion.
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