Treating Unequal Heirs Equally?
“The greatest inequality is treating unequal people equally” – Ron Blue
As I work with families, one obvious inequality issue is how to treat the child who has been involved in the family farm or other business fairly as compared to those who went off to pursue other careers. Fairness may require that we protect the child who is in the family business because he or she sacrificed other options and went through hard times to help make the business what it has become.
But today let’s consider a different kind of inequality. This article’s sub-title is a quote from the bright mind of Ron Blue and can be found in his book, Splitting Heirs. He also writes, “If you pass wisdom to your children, you probably can pass wealth to them. If they have enough wisdom, then they may not need your wealth. [But the] worst thing you can do is to pass wealth if you haven't passed wisdom.”
Assume you have 600 acres of prime farmland and you want to leave it equally to three non-farming children. Dave is a Physician’s Assistant, has three children with his everything-you-could-ever-hope-for-in-a-daughter-in-law wife, and you know they have accumulated substantial savings. If anyone has inherited your best wisdom about life and responsible living, it is Dave.
Your second child, Emma, is as sweet as can be. Her husband is a spender and a bit domineering. Their kids seem to be doing okay, but you often ask her “how’s it going Sis?” because you’re always a bit worried about her. Then there is Frank, your youngest. Simply put, Frank is divorced…twice, so far… has one teenage daughter. Frank has battled substance abuse issues off and on for most of his adult life. He is clean today, and you are optimistic.
If you love your children equally, and care about their well-being, I suggest that you must tailor their inheritance to their unequal stations in life. How?
You thoughtfully develop an estate plan
. Combining your thoughtful care and a counseling-oriented attorney’s advice, you create a living trust. It provides that upon your death, three separate trusts are created, each to hold 200 acres. Let’s call them Trust D, Trust E, and Trust F for Dave, Emma, and Frank.
Why even bother leaving Dave’s 200 acres in a trust? Trust D can protect against two primary threats. First, being successful in his own right, Dave may have an estate tax problem when he dies. Trust D can assure that the 200 acres will not increase Dave’s taxable estate. We refer to this as GST Planning
since the value of the inheritance can skip taxation for multiple generations. Second, Dave is always going to be vulnerable to a lawsuit. Like all of us, he could be sued if he has a traffic accident; but being in the medical profession has even greater lawsuit risks. Trust D would protect the 200 acres from such lawsuits.
Trust D would be designed to keep Dave in control. You name him as the Trustee, and as such he can have unlimited power to buy, sell, and reinvest. Whatever assets are in Trust D remain protected (even if he sells the land and reinvests in something else). Trust D allows Dave to withdraw any of the income (rent, interest, etc.) he wants. He appoints a friend as cotrustee of Trust D, and the two of them (he and his cotrustee) distribute to Dave any principal (assets) that he needs. Whatever income and principal accumulate in Trust D will stay protected and available for his “rainy day” or to pass on as he directs at his death.
Trust E is similar for Emma. It will protect the assets from future estate taxes and a lawsuit. She may have the right to withdraw any of the income she wants. But the influence of her husband is an extra concern for you, so an important difference (from Trust D) is the trusteeship. You name Emma as a trustee of Trust E, but name a CPA as her cotrustee, and require that if the CPA stops serving, a bank will serve instead. All decisions about investments and about how much principal will be distributed—i.e., how much principal does Emma need to live comfortably?—must be approved by the CPA or bank trustee. This helps insulate Emma from pressure by her husband to deplete Trust E.
Trust F is quite different. You want it to help Frank and not hurt him. The 200 acres in Trust F will be managed by Smalltown Bank & Trust as trustee. The bank must distribute income and principal as needed to provide for Frank’s daughter and to help Frank as needed. The trustee is to give Frank more money for discretionary spending while he is drug-free. If he relapses, provide counseling and rehab but don’t let him directly receive any money to misuse.
Each of the unequal children inherits 200 acres. But with careful planning, you maximize the positive impact it will have on each of them. This is the very essence of careful, caring estate planning.