“Even though determining how to pass on assets is not always clear cut, many people decide to simply divide assets equally among their heirs. Yet in a number of different situations, ‘equal’ may not be fair.”
Forbes’ article, “Where Inheritance Is Concerned, Equal May Not Always Mean Fair,” asks you to consider a scenario in which you died with two children, a 25-year-old daughter and 16-year-old son. The older daughter is a recent college graduate for whom you paid all of those expenses amounting to $250,000. At death, you had assets of $1 million. If your estate plan provided that you distribute you estate equally in a trust, then the younger son would have to pay for his college using proceeds from his portion of the Trust.
As a result, after college expenses, the son will be left with $250,000 and the daughter will have $500,000. Although you distributed your assets equally and split the estate right down the middle, you may not think equal is fair.
This same type of inequitable distribution can also happen if you own a home, business or other sizable assets.
One way to avoid the “inequality problem” is to create an irrevocable trust that holds assets that will not be divided equally until—as in the example above—both children have completed college. Another option is to elect to “never” distribute assets by designating a child as the trustee of the trust at a specific age and giving her the authority to make distributions to herself, without inheriting the entire estate and paying estate taxes.
This type of estate planning can be complicated, particularly if you try to create a trust in a vacuum and don’t plan ahead and consider variables and contingencies. It is important to speak with a qualified and experienced estate planning attorney.
An irrevocable trust lets you plan for the specific needs of your family and can provide asset protection. If you don’t have the trust distribute the assets immediately, a son who gets divorced is, in effect, given “divorce protection” from having assets in trust—even where the child is the trustee. In some circumstances, a trust can also provide protection from creditors and litigation.
The important thing is to think about your intentions for your assets generally, such as whether to provide for education, ongoing support or maybe an emergency fund. When you determine your overall intentions, an estate plan can be created to make certain that those intentions are executed, regardless of the unknown events which occur in life.
Reference: Forbes (February 27, 2017) “Where Inheritance Is Concerned, Equal May Not Always Mean Fair”