Family inheritance: Does fair mean equal?

“That’s not fair,” is a refrain that nearly all parents have heard in their lifetimes, often from squabbling toddlers or adolescents. However, this basic instinct to seek fairness may not completely fade with age. The issue can become more visible as you embark on estate planning and try to determine ways to fairly distribute assets and inheritance.

Many families with wealth and assets to pass on later in life or at death may think that being “fair and equal” in the treatment of family inheritance is an easy process. However, estates can be complex, and trying to establish a “fair” distribution of assets may not always result in “equal” distribution for all beneficiaries.

According to Thomas Thiegs, senior leadership and legacy consultant for Ascent Private Capital Management of U.S. Bank, any number of variables can affect estate distribution decisions. “In reality, your children will have different needs and different expectations,” he says. “We focus on trying to help families find ways to treat each beneficiary fairly – but that may not always be equal.”

Reflecting life’s complexities in inheritance planning

For many parents, a variety of factors can affect family inheritance planning. It isn’t always as simple as equally dividing one pot of money.

“You may have property, personal items, or a family business to consider – the types of assets that are more difficult to divide in an equal manner,” says Thiegs. “Finding ways to divide such property as fairly and equitably as possible may require some creative thinking.”

A perfect example is a family vacation home. The family inheritance plan may be for parents to leave the home to their children. However, one child might live relatively close to the property and have easy access to it, while another might live across the country or even abroad and use the property sparingly.

“In a situation like this, different assets could be directed to the child who lives a long distance away,” says Thiegs. “Another option would be to pro-rate access based on children’s expected use, adjusting other inheritance based on their unequal use of a large asset.” This highlights the extra thought and creativity that often needs to go into the inheritance planning process to try to achieve a sense of fairness.

Gifting challenges

Parents may decide they want to help their adult children financially during their lifetimes. When one child has more need for financial assistance than their siblings, fairness becomes a bigger concern. “Parents usually have the best of intentions but often treat their adult children differently when it comes to financial support,” says Thiegs.

For example, a parent might loan money to an adult child for a down payment on a home but ultimately forgive that loan. Another child who was determined to “make it” without financial help from their parents might feel slighted by this arrangement. “You may actually want to establish a loan or investment policy that outlines what resources are available to family members,” Thiegs continues.

In other situations, parents might own a property that one child would like to inherit. “The home could be worth a lot of money, so if one child primarily benefits, others may be compensated with something else,” Thiegs says. He adds that if such a property is gifted to one or even multiple children, parents should be confident that children are interested in retaining the property.

Inheritance planning for blended families

Significant tensions and animosity can easily occur when families are combined through a second (or later) marriage and when children are involved. Children who come from a first marriage may have certain expectations of what will be left to them. But parents may alter their plans if they remarry, particularly if the new spouse already has children or the newly married couple decides to have children together.

In the throes of a budding, later-in-life romance, the idea of signing paperwork before marriage may seem unsentimental to many. However, there are several practical reasons for couples to “put it on paper” to sidetrack potential disputes down the road.

Prenuptial agreements are particularly beneficial in certain situations. One is when there is one spouse who comes into the marriage with significant assets, while the other has few. Another is when a family business, particularly one that has been around for multiple generations, is controlled at least in part by one of the parties.

“Don’t expect to marry into a family and assume that you suddenly have ownership rights to their long-held business,” says Thiegs. “Fair is not equal and equal is not fair when it comes to marrying into a family with a business.”

Yet Thiegs also emphasizes that when a person marries into a family of wealth or one that owns a business, “their role really matters, and they need to be treated fairly. Treating new family members with respect is vital, even if lines are often drawn where bloodlines end,” he says.

“Having conversations on this matter is key,” he adds. “Expectations need to be managed, and possibly revised, when one or more parent’s marital status changes.” He notes that these situations can easily get complicated and that clear family discussions are critical.

Managing family inheritance disputes

No matter the amount, money is a common reason for family discord. Sometimes, it’s not even the money itself that causes family inheritance problems; it’s the emotional significance people attach to that money.

With that in mind, families with significant wealth would be wise to seek the guidance of a financial professional who is emotionally neutral and has experience in keeping family members from fighting over inheritance issues. Clear expectations and communication, combined with the dispassionate support of a mediator, can help avoid or resolve estate disputes between siblings and other family members.

And while it isn’t always possible to treat your estate beneficiaries in a way that seems perfectly fair or equal, there are ways to help you come closer to that goal. Consider writing a financial legacy letter for your heirs that expresses your hopes, dreams and intentions for them.

Ultimately, you want all family members to understand how the family inheritance plan will distribute your assets while you’re alive or after your death. Family dialogue and guidance from professionals can help you develop a strategy that meets expectations for all affected parties.

Learn how U.S. Bank wealth advisors and teams can work with you to manage your wealth today and create a legacy for generations to come.