Leaving an equal inheritance is not always fair.
And, leaving a fair inheritance is not always equal.
It can be complicated, yes?
You have several children.
As you plan for your asset distribution, you consider giving equal amounts to each.
This seems fair at first glance.
According to a recent The New York Times article titled “The Unequal Inheritance: It Can Work, or It Can ‘Destroy Relationships’,” an equal inheritance is not necessarily fair to your children.
Beyond favoritism (think “Smothers Brothers”), there are many valid reasons for an unequal distribution of assets.
You will need to consider your family situation when creating your estate plan.
If you choose to give unequal amounts to your heirs, your loved ones may interpret this as a unloving.
Then again, even equal distributions can seem unfair.
To avoid family fighting, explain your decision and your reasons to your children.
You can tell them individually or as a group.
Some families benefit from mediation with the meeting occurring at a neutral location.
If one child has a disability or a lower earning potential, the other siblings will likely understand the choice when explained.
Another reason children may not receive an equal inheritance is if you provided more financial support to one child at an earlier date.
If one child serves as the primary later-in-life caregiver, parents often choose to compensate this child for his or her help.
You could provide the child with life insurance proceeds, the family home, or a larger cash distribution to show your gratitude.
Do you have a blended family?
If the answer is “yes,” unequal bequests are not uncommon..
Parents often choose to provide an inheritance only to their own biological or adopted children.
Stepchildren are more likely to be given an inheritance if the parents have been married for a longer duration.
What if you choose to leave an equal inheritance to your children?
You could still unintentionally leave unequal shares to your children.
How does this happen?
If you leave different types of assets to each child, these children may owe varying amounts in taxes.
For example, if you leave an equal inheritance of a $500,000 taxable brokerage account to one child and a $500,000 IRA to another, these children are subject to different rules.
The child with the IRA must clear the account within ten years of the death of the parent.
Not only that, but every dollar is subject to taxation as ordinary income at the child’s marginal rate on top of their own income (likely pushing them into a higher marginal tax bracket).
The other child with the brokerage account will pay a long-term capital gains tax of up to 20 percent when the appreciated asset is sold, but only to the extent the account has appreciated since your date of death.
How do you solve this possibility of accidentally providing unequal inheritances?
You should name children as equal beneficiaries of your brokerage account and your IRA.
If the home has been left in a trust or through the will, you can direct that the house be sold and the proceeds then divided among your children.
Whether you choose an equal inheritance or unequal distribution, you should work with an experienced estate planning attorney to ensure your plan meets your goals.
Reference: The New York Times (Feb. 19, 2021) “The Unequal Inheritance: It Can Work, or It Can ‘Destroy Relationships’”