Posted by Income Taxes and Bookkeeping LLC

How To Divide Your Estate (Equally) Between Multiple Heirs

How To Divide Your Estate (Equally) Between Multiple Heirs

Writing a will is stressful, but it's never a bad time to start estate planning. Whether motivated by age, circumstances, or sometimes guilt, estate planning is a necessary step in life.

An important question that many parents often ask themselves is: should we treat our children the same when distributing property?

On its surface, distributing assets evenly among your children seems fair, which is why many parents implicitly choose this approach. Intuitively, a fair distribution seems obvious and, in most situations, makes sense. However, given each family's unique dynamics, there are circumstances in which "equal" no longer makes sense.

When unequal inheritances are the right decision

What if one of your kids has special needs that require ongoing medical care or some kind of supervision fee? In these circumstances, you may consider creating a special needs fund, either inter-vivos (currently) or testamentary (in the event of death), so as not to interfere with the person's eligibility for Social Security or any other financial aid.

Another situation that could justify unequal distributions is when adult children have not achieved the same financial success and earning capacity. Some parents may think they are honest, leaving more of the child with fewer resources, but this can be a difficult area to deal with. As a financial advisor, I have heard several beneficiaries ask why they should be penalized for their financial success. In general, I don't recommend basing stock distributions on earning power unless there are extreme income inequalities. Nevertheless, you must communicate openly with all the heirs when drafting your real estate plan.

Another situation where unequal distribution is appropriate is when some beneficiaries are involved in a family business while others are not. Additionally, when real estate includes illiquid assets, differences in liquidity and tax attributes should be considered in the decision.

Per Stirpes vs. Per Capita

In my experience, most clients have taken the simpler approach, which is to divide their wealth per stirpes. This implies that each branch of the family receives an equal share of the property. This approach can be particularly important when an heir dies before their parents. If a child dies before his/her parents, his/her share will also go to the grandchildren.

Instead, a per capita "split per head" approach assigns equal shares to each heir. This makes so much sense in theory, but in practice, it could mean that if an heir died before their testator, the grandchildren would receive the same amount as their surviving uncles and aunts. Therefore, a per capita approach can have unintended consequences.

Per capita by generation

A per stirpes and per capita is referred to as per capita by generation.

Using this wealth planning approach, the second generation will receive what was promised. The heirs of the next generation will each receive an equal share of the share that goes to the entire third generation, regardless of their connection to the second generation.

Estate planning is not easy, but it is necessary.

How you decide to give your money after you are gone has long-term implications. This is why it is necessary to have an open and honest conversation with all the stakeholders in your estate plan. Working with your lawyer, consider hiring your financial advisor to deal with all key estate planning issues, including appointing guardians for children, determining the children's age to inherit, choosing an executor, and other considerations.

Family struggles are something no parent wants to leave as his or her legacy. If all the heirs are on the same page long before the will is read, bad feelings are less likely to appear later.



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