Your Guide to Estate Planning: What’s the Difference Between Fair and Equal

 

An “equal” distribution is the most straightforward approach—you divide your assets equally between your beneficiaries. A fair approach, however, accounts for multiple factors, such as how much each child earns, involvement in the family business, and more. “There’s not a one-size-fits-all strategy,” says Jeanne Krigbaum, Chief Wealth Planning Officer for 1834, a division of Old National Bank. “Determining how much of your assets each of your children receive can be one of the more difficult parts of your plan.”

 

The key is understanding your distribution options, considering the factors that inform your strategy, and then communicating your plan to your beneficiaries. Do this, and you’ll provide clarity to your children about your decisions and reduce the potential for misunderstanding or hard feelings.

Equal versus fair

As Krigbaum noted, an equal distribution strategy is just that—equal. For example, if you have three children and your estate is worth $12 million, each child receives $4 million. “If you envision everyone getting an equal share of your estate and everyone is financially responsible, then this is a straightforward path,” Krigbaum says.  

  

But in many families, there are other issues to consider. This is when a fair distribution strategy, which accounts for each beneficiary’s circumstances, may make sense. For example, one child may work in the family business, contribute more to the ultimate value of the family’s assets, and receive a distribution that reflects that.  

  

In another example, one child may have a job with a much higher lifetime earning potential than his or her siblings. Or on the flipside, one beneficiary may struggle with overspending, have substance abuse issues, or other mitigating factors that might make a parent wary of bequeathing a significant sum. Distributions based on what’s fair can help address some of the differences between beneficiaries. Additionally, you can also include different mechanisms for how and when your beneficiaries receive the distributions. For instance, you may implement a trust with requirements or milestones beneficiaries must meet before they receive an inheritance.

Critical questions  

Krigbaum says that each family “will come up with a plan that works best for their goals and their beneficiaries.” To help determine the distribution approach that fits your family, consider the following questions:  

  

• Are your beneficiaries close in age and/or in similar life stages?
• Are they financially responsible?
• Do they have other sources of wealth?
• Do they have comparable income levels or earning potential?
• Are they involved with the family business?

  

Families might also consider whether their beneficiaries have children or if they’re married. The latter raises questions of who is included in the estate plan and whether you want to keep assets within your family’s bloodline or distribute a portion to your children’s spouses or other in-laws.

Start early, communicate often

“It’s never too early to start estate planning,” Krigbaum says. Think of your plan as achieving your goals for the next five years. She urges clients to consider their values and goals and how an estate plan can help them achieve them.  

  

Your financial advisor plays a critical role in this process, serving as a liaison between you and your estate planning attorney. An advisor can align your estate plan with your current financial plan, leverage tax strategies to optimize wealth transfer, and even help educate and communicate your plan with your family.  

  

“Communication is key,” Krigbaum says. “While there are certainly parts of your plan you may prefer not to share—like dollar amounts—you will/want to communicate enough of the plan so your beneficiaries understand how it works and why.” Without that information, beneficiaries often make assumptions about decisions—and they may come to inaccurate conclusions.  

  

Determining how you divide your estate is a personal decision that will be different for every benefactor and family. But by taking a thoughtful approach to your strategy, asking the right questions, and tapping your financial advisor’s expertise, you can build a plan that fits your—and your beneficiaries’—needs.  

  

Are you interested in learning more about estate plan distribution strategies? Connect with a wealth advisor from 1834, a division of Old National Bank today.