TRUST & ESTATE PLANNING

Be Fair to Your Heirs

Treating Children Fairly in Your Will

04.14.2017 - Kevin Duncan

When parents consider how to pass assets to their children, the question of how to divide wealth among the children often arises. While making this determination can sometimes be difficult, fostering a cohesive and happy family dynamic is a goal most parents share.

Q. The question about how to treat children often arises when parents are planning a Will. What advice can you offer in this regard?

KEVIN: We almost always say the most important thing is that the children get along with each other after the parents are gone. We also say in general, in our experience, children expect to be treated equally. We ask parents to think about what they can do as they craft their Wills that will be understandable to everybody and will encourage their children to stay together as a family. The answer is different in every case, but the decisions parents make should be centered on this primary goal.

Q. When the client has minor or dependent children, how do you plan for younger children?

KEVIN: We frequently recommend that assets pass into a discretionary trust for the benefit of all of the children until they have reached adulthood. While the children are still young, the trustee would have discretion to make distributions for the children’s education, support, maintenance, health and other needs. This allows a trustee to allocate trust funds among the family in a way that would be similar to parents managing their children’s expenses. When the youngest child reaches a designated age, such as 25 (or an age when all of the children can reasonably be expected to have finished college or be on their own), the trust would be divided into separate shares—one for each child—and held in separate trusts.

The idea is that each child receives the same footing in life before they are reliant on their own assets for their full support. If, instead, the estate plan had called for the parent’s assets to be divided into separate shares immediately, regardless of the child’s age, a much younger sibling would be at a financial disadvantage to an older sibling. Think about a family with three children—aged 24, 21 and 16. Assume further that the 24-year-old finished college and has started working, the 21-year-old is a college senior and the 16-year-old is in 10th grade. If they each receive one-third of their parent’s estate immediately at the death of the parent, the 16-year-old’s share would presumably have to cover costs that the parents had taken care of for the older siblings, such as college tuition.

Q. How should parents treat adult children with varying financial circumstances?

KEVIN: Parents often wonder whether they should give more to a child with less resources. As I mentioned before, our experience is that most adult children expect to be treated equally, regardless of their own financial situations. We also urge clients to be mindful that problems can arise if parents treat children differently based on one child’s current situation, and that situation changes. For example, excluding one child who is very well-off financially at the time the Will was drafted may seem logical and fair; however, that child’s own financial picture may later be altered by divorce, job changes, health issues and many other situations.

It is possible to be fair and treat children equally by using trusts for all of the children, even if the children’s needs are vastly different. The manner in which the trusts are administered will vary from child to child, depending on that child’s needs. The trust provisions should be very flexible, as circumstances and tax laws change over time.

Q. Is it wise to include grandchildren in a Will?

KEVIN: Yes, it may be a good idea to include grandchildren in a Will.

As long as adult children are adequately provided for, grandparents may wish to take advantage of the generation- skipping transfer (GST) tax exemption, which allows assets to pass tax free to descendants. A GST trust is a great vehicle for facilitating this tax-free transfer. The trust can be set up to benefit descendants, and assets can be used to benefit children as well as grandchildren and continue to transfer tax free in trust to great-grandchildren and even to more distant generations.

The question of equality may arise depending on how gifts to grandchildren are structured. For example, in one situation, a grandmother’s Will directed assets to be allocated equally to her five children after a certain amount was provided to each of her eight grandchildren. One of the siblings did not have his own children. He believed it was unfair for his portion to be reduced by the amount provided to the children of his siblings. The lesson in this example is that grandparents should think about how gifts to grandchildren may affect the long-term relationships among their own children, as well as between a grandchild and his or her parent. But they should, of course, follow their own wishes in deciding whether or not to make those gifts.

Q. How can parents ensure the wealth they pass down is managed fairly with respect to the interests of future generations?

KEVIN: When assets are meant to benefit multiple generations through trusts, the selection of a qualified trustee is critical. The trustee is in the position to make discretionary decisions related to how assets are distributed. These decisions are not always black and white, and very personal information is sometimes required from the beneficiaries for the trustee to be able to make prudent decisions. Family dynamics can deteriorate significantly when a single family member is put in a position of such power. For that reason, we do not recommend a family member be appointed as sole trustee, because it is sometimes difficult to be both a family member and a fiduciary, whose duty it is to be impartial.

It is far better to appoint a neutral trustee, ideally a professional, who can be highly objective and can manage the assets and protect the interests of the current generation as well as the interests of future generations. Professional trustees have the experience needed to make firm yet fair decisions and, since these trusts can last over many decades, appointing a professional trustee eliminates the risk of the trust outliving the trustee.

Q. Should prior gifts made to children factor into the decision of how to distribute assets in a Will?

KEVIN: Prior gifts can be treated in different ways. One approach is to treat lifetime gifts as advances on a child’s inheritance. Another approach is to disregard those lifetime gifts and treat all children equally under the Will. The right approach may depend on why the lifetime gifts were made. For example, disregarding lifetime gifts may make sense if the gifts were necessary for a child’s immediate needs. On the other hand, if the lifetime gifts to one child were part of an overall plan that may not have yet been fully carried out (such as the plan to give each child a down payment on a house), equalizing bequests may be in order. There is no right answer here as it does depend on the particular situation.

Q. Should parents involve their children in discussions about their Will?

KEVIN: This is a very difficult question and people’s views on this vary tremendously. Many people believe it is important to have that conversation ahead of time so that the adult children understand how the parents plan to distribute their wealth. This may be particularly desirable if there is an intention to perhaps treat children unequally, or if the adult children have taxable estates themselves.

Of course, it may not be in the best interests of the parents or the children to allow the children to have too much say over these decisions. Our experience is that under most circumstances, children should be treated equally to achieve the best and most harmonious outcome in the long term.


This communication is intended solely to provide general information. The information and opinions stated are as of April 2017, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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