If you thought doing your taxes got complicated when you acquired more assets, wait until you try to split them up among multiple children when planning their inheritance.
“Dividing assets equitably among heirs is one of the most challenging aspects of estate planning, especially when dealing with complex holdings such as real estate, family businesses and investments that cannot be divided,” said Matt Odgers, an estate planning attorney with Opelon LLP.
With your legacy on the line, navigating this complex and sensitive process is something you must get right the first time. Here’s what you need to know.
According to Rise to Win, “Equality means everyone is treated the same exact way, regardless of differences. Equity means everyone is provided with what they need to succeed.”
If you have more than one heir, you’ll have to choose one or the other.
“The notion of ‘equal’ may not always lead to a fair — or equitable — outcome,” said Paul Wood, FRSA and founder of C-PAID, which deals with contested probate and inheritance disputes. “An equitable distribution — considering the individual circumstances of your heirs — could be more suitable.”
Wood gave the example of one child in good health who owns a business and a mortgage-free house, and another who cannot work and relies on government benefits.
“An equal solution would be to split everything evenly,” he said. But arguably, the first child in this example is in less need than the second child. An equitable, or fair solution may be to gift the latter child a larger distribution so that they can drastically improve their own quality of life.”
Trusts are the preferred legal mechanism of estate planners because they bypass probate, offer tax advantages and protect assets from creditors. But they also provide a means for ensuring the distribution you desire.
“Trusts are a valuable tool, allowing for control over how and when heirs receive their inheritance, ensuring that it’s distributed according to the parent’s wishes,” Odgers said.
Trusts can be revocable or irrevocable, living or testamentary, and they can include custom rules and special arrangements to suit just about any situation — but two asset classes are especially challenging to distribute equitably, even with a trust.
Assets like savings accounts can be easily split in any number of ways. But indivisible assets pose unique challenges.
“When dealing with complex holdings like businesses or real estate, it is important to consider the dynamics among beneficiaries and what potential issues may arise,” said Jason Gray, attorney and owner of Pinnacle Estate Planning.
With property distribution, it’s essential to establish the current market value with an updated appraisal.
“This ensures fair distribution among heirs,” Odgers said.
But more important is the decision of whether to liquidate the property and distribute the proceeds or establish joint ownership among your beneficiaries.
“If the property cannot be divided equally, such as a single residence, consider establishing a trust that allows the property to be held jointly,” Odgers said. “Alternatively, the trust can be set up in a way where the real estate is to be sold, and proceeds divided between heirs.”
It’s common for heirs to have conflicting desires regarding indivisible assets — one who lives close by might want to run the business or retain the property and another who lives far away might not.
“One approach is to provide clear instructions in the will that require the liquidation of the assets if the beneficiaries cannot reach a unanimous agreement on how to manage them,” Gray said. “This option avoids potential conflicts and provides a clean break, allowing for the equitable distribution of the proceeds among heirs.”
For family businesses, Odgers recommends a buy-sell agreement
“This allows one heir to buy the others’ shares at a predetermined price, ensuring everyone receives fair compensation,” he said. “Alternatively, a family-limited partnership can be established to maintain control within the family while distributing profits equitably.”
Some cases require a trust to empower a neutral third party.
“Alternatively, appointing a professional fiduciary as a trustee can be a wise decision,” Gray said. “A skilled and impartial trustee can navigate the complexities of managing business interests or real estate holdings, making decisions in the best interests of all beneficiaries. This ensures ongoing management, growth, and protection of the assets while minimizing potential disputes among family members.”
Real estate and businesses aren’t the only assets that might require third-party involvement.
“Investments can be complex to divide due to fluctuations in value and the potential tax implications of liquidating assets,” Ogders said. “Therefore, it’s crucial to work with a financial advisor and an attorney to understand these complexities and devise a plan that minimizes tax burdens and ensures an equitable distribution.”
For retirement accounts and life insurance policies with beneficiary designations, you can name heirs equally as beneficiaries or set up a trust and name it as the beneficiary, according to Ogders.
“The trust would then need to have instructions on how to distribute the assets to the heirs in a fair and equal manner if that is the intent of the grantor,” he said. “Beneficiary designations for retirement accounts and life insurance policies should be updated regularly to ensure that they align with the overall estate plan. In addition, clients should work closely with a financial advisor and CPA to ensure that naming the trust will not create any adverse tax consequences.”
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