Why Unequal Isn't the Same as Inequitable in Inheritance Matters

Estate planning can be complex if you have more than one heir. You could divide your assets equally between your siblings, offspring, or dependents. But this might not be the fairest approach. In some cases, an equally divided inheritance might not provide the desired benefits.

Estate planning can be complex if you have more than one heir. You could divide your assets equally between your siblings, offspring, or dependents. But this might not be the fairest approach. In some cases, an equally divided inheritance might not provide the desired benefits.

Of course, there are instances when the fairness of unequal distribution can be questionable. In such cases, family members can have hurt feelings. Different amounts of money can be distributed to adult children.

For example, a parent may give a larger inheritance to a favorite child. Or a parent may cut someone out of a will entirely because of their differing moral, political, or social views.

You can bequest an amount of money in unequal percentages. Below are different factors to consider if your estate planning involves an unequal allocation of your assets. Taking factors relating to unequal inheritance into consideration may help minimize squabbles.

What Are Fair Division and Equitable Distribution of Inheritance?

A fair division of inheritance is when each beneficiary is left an equitable share of an estate in a will.

A fair division is different from a bequest of equal inheritance, where there is an equal split of assets. This is the equal division approach. Equal division does not take any external factors into account. With an equal division approach, each beneficiary gets an identical portion of the inheritance. For example, if you have four children and an estate worth $400,000, each child would inherit assets worth $100,000.

Equal division does not consider external factors. Thus, it may not be the fairest option for some beneficiaries. Suppose you paid $60,000 each for the university tuition for three children. The fourth is yet to enroll in college. This fourth child must use most of their inheritance to pay for their education.

To make this situation equitable, you would increase the fourth child's inheritance to prevent an inequitable division. You would add $60,000 to the fourth child's inheritance from the other siblings' allocation. A fair division can consider past spending on beneficiaries.

The mathematical subject of game theory offers another approach to fair division. It suggests that people assign different values to the same assets. For example, a child may have a sentimental attachment to the family home. Or a child may work in the family business and assign a greater value to their career than the profits they might earn from selling the business.

In these examples, beneficiaries are willing to accept a lower monetary value. In their eyes, the personal value of their inheritance is equitable.

Times When Unequal Division of Inheritance Is Fair

There are a variety of instances when an equal distribution of an estate is unfair to some beneficiaries. Past contributions to beneficiaries can change the proportions of estate distribution. Many other factors can create an unequal but fair inheritance situation. Below are specific examples.

A Caregiving Child

Some parents need care as they age. These individuals may leave a significant portion of their estate to children who serve as primary caregivers. Sometimes, a parent may see the larger inheritance as a reward for their caregiver. The parent may view the bequest as a repayment for any career or family ambitions the caretaker had to sacrifice to assist.

Other beneficiaries may dislike this unequal distribution. They may question the motives of the caretaker. However, it is up to the benefactor to decide how much value to place on the care given to them by the beneficiary.

Blended Families With Stepchildren

Children can be a reason for an unequal distribution of an inheritance. The presence of biological children and stepchildren can lead to unequal distribution. You can give your biological offspring a more substantial share of the estate and bequeath a partial amount to stepchildren.

This type of distribution assumes that biological children have priority over inheritance. Those who may not have blood relations with the family could receive a smaller inheritance.

Tax Situations

Estate taxes can unintentionally create an unequal division of assets. If the inherited assets are taxed at different rates, those who inherit assets with a higher tax rate will get less value out of the estate.

For example, if one child inherits real estate, such as the family home, it comes at a cost. The beneficiary must continue to pay property taxes and insurance premiums.

Taxation can also play a part if you inherit a stock portfolio or a retirement account. When the beneficiary sells the stocks, they must pay capital gains taxes. The money withdrawn from the retirement account will count as income.

An estate could consider these tax liabilities. They can add them to the overall value of the inheritance. Each beneficiary would inherit a fair division of the estate after taxes.

You could also give away parts of your estate as gifts to avoid estate taxes. If you fail to do so, your beneficiaries might have to pay if your estate exceeds the federal limit for inheritances.

Children With Specific Greater Financial Needs

Some children may have specific needs. For example, a child with a disability might need money for an assisted living facility. You could also provide that child with other types of financial support to ensure they receive proper care during their lifetime.

Instead of giving the beneficiary a greater share of your assets, you will usually set up a special needs trust to cover the extra care expenses. Such trusts distribute money in a way that will not jeopardize support from government assistance programs. If they receive assets directly from a will, they may not meet the income requirements for these disability programs.

How To Handle Unequal Divisions of Inheritance

You may feel that your estate plan achieves an equitable distribution of assets. When a child is especially well-off, it may be obvious why an inheritance is unequal in its division. There may be no hard feelings among the beneficiaries. However, the heirs may disagree.

Family Meeting

You can take steps to defuse any tensions related to inheritance. A family meeting can go a long way toward getting everyone on the same page. You can use this time to explain the estate plan to all beneficiaries.

Discuss With Each Beneficiary Individually

Alternatively, you can meet with each child individually. Even if benefactors disagree with your decision, at least they would be aware of your rationale.

Lifetime Gifting

You may also consider lifetime gifting to reduce assets that must be transferred at your death. Even if estate taxes aren't a concern, it could be a good idea in your situation.

Review Your Will

You should also ensure that your will is clear. A well-drafted document can minimize the risk of disputes between beneficiaries after your death. Another option is to forego the will as the primary vehicle for distributing your assets.

Titling of Assets To Pass as an Operation of Law

You could create payable on death accounts ("POD accounts") for each asset where this option is available. Some states even allow a transfer on death deeds for real property. The assets will transfer directly to the beneficiary upon your death. Joint ownership can streamline the inheritance process. Beneficiary designations also help beneficiaries avoid disputes or trips to probate court.

It's Your Decision

In the end, you can transfer your assets as you see fit. You can do your best to minimize anticipated disputes after your death, but that's all you can do. You cannot control how individuals react to your decisions. The best you can do is create a prudent plan with the facts you know.

Need Help Understanding the Implications of Unequal Distributions? An Estate Planning Lawyer Can Help

If you have specific questions not addressed in this article, an estate planning attorney can help. You can discuss your situation and get advice on how allocations will impact beneficiaries. You can also get assistance with your family meeting. An estate planning attorney can also review your estate planning documents to ensure they best reflect your objectives. You may find a local estate planning attorney through FindLaw.

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