Fairly, Equally or Equitably: Dividing Your Estate
When the goal of building wealth is to advance the quality of life for multiple generations, planning decisions must be made about how to distribute the wealth. These are not always easy choices.
Passing on significant wealth, can often lead to disagreements and sometimes, out and out fractures among family members. Conflicts about how the money should be managed, who should get how much, and when, can turn family members against each other, if parents do not make a considerable effort to communicate their wishes, and then stand firm about their decisions.
A recent article in Forbes, “Two Key Steps to Successful Estate Planning,” provides a useful framework for thinking about how to distribute wealth.
First, consider how you want the estate divided. Estate planners say that the three ways of dividing an estate are fairly, equally, or equitably. Many parents feel obligated to divide the estate equally. However, a better answer for many estates, especially those with above average value, is to use all three ways to divide the estate. A father may decide he’ll provide for each of his children through graduate school or as far as each chooses to go with their schooling. That’s known as the “fair” allocation of wealth. Although it is likely that different amounts will be spent on each child, each one is given the same opportunity and is able to maximize his or her own talents and interests.
One portion of the estate is for equitable giving to people a parent believes helped them or earned it in some other way. Some make equitable distributions from their estates to employees. A child who helped build the business more than the others, helped care for an ailing parent, or made some other extra contribution might receive an equitable distribution.
The rest of the estate is split equally among the children, with each getting approximately equal value from the estate.
This blended distribution approach can make sense, because each type of bequest has a different purpose. The fairness gifts motivate the children and give them opportunities. The equitable gifts reward people, and the equal gifts are to increase financial security for children and perhaps future generations.
This is the part of estate planning that takes place outside of the attorney’s office. It requires parents to take responsibility for teaching their children from an early age about wealth, the responsibilities that come with it, and as the children grow, continuing the conversation. It’s never too early, or too late, to start this discussion.
Reference: Forbes (May 15, 2018) “Two Key Steps to Successful Estate Planning”