Most parents want to treat their children fairly in their estate planning, and many assume this means that their children should have an equal inheritance. But fair does not necessarily mean equal. In some families, there may be special circumstances to consider.
For example, parents may want to provide more to a child who struggles to support his or her family than to a child who is financially successful and has decided not to have children. Many parents believe it is fair to provide extra compensation to a child who has given up part of his or her own life to help with a parent’s care. Younger children will need care longer than grown children, and a child with special needs will need care for life. Often, one child will join the family business and other children will not; instead of making them all equal owners in the business, it may be more appropriate to leave the business to the one who has shown an interest and compensate the others with other assets and/or life insurance.
Not only do parents need to decide how much each child should receive, but also when they will receive it—and that can be different for each child, too. Inheritances can be distributed in one lump sum or in installments, or an inheritance that can stay in a trust. Parents should consider how much the inheritance is, the children’s ages and family situations, how they have handled their own money in the past, and how much they need the inheritance. For example, children who are much older (say, in their 60s) and have shown responsibility with their own money may be fine with inheriting one lump sum. An adult child who is struggling to buy a home may appreciate at least a partial immediate distribution, with the rest later. Younger adult children may benefit from inheriting in installments to allow several chances to become responsible with money.
Many parents decide to keep money in a revocable living trust for their children. That’s because assets that stay in the trust are protected from irresponsible spending, creditors (bankruptcy and divorce), and predators (those with undue influence on a child). The trustee can still make periodic distributions based on guidelines provided in the trust document. This can be a good solution when a child is irresponsible with money or has dependency issues, where there is concern that a current or future marriage might end in divorce and the parents want to protect the inheritance from being part of a divorce settlement, or where there is a concern that the inheritance may be exposed to future lawsuits or creditors of the children.
If you can afford it, you may want to consider giving your children some of their inheritance now so you can see the results of your gifts now. Seeing your children buy a home, start a business or be able to stay at home and raise your grandchildren or seeing the grandchildren go to college, and knowing this may not have happened without your help, can be very heartwarming. Also, gifts made now will reduce the amount of estate taxes that may be due at your death.
Most parents want to leave their children enough that they can do anything they want, but not so much that they will do nothing at all. You don’t have to leave everything to your children. If you have sizeable assets, you can set up trusts for your grandchildren and future generations and/or make contributions to charitable, educational and religious organizations.