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INTRO: Parents usually try their best to treat their children equally and children tend to expect that. In this blog post, I will explore two primary questions that have come up time and time again in my practice, two questions that are worth your time to consider – Is equal always fair? How does equal work in the context of estate planning?
While giving to children equally is a common parental goal, it is impossible. Children have different needs, intellects, hobbies, educational goals, aspirations, etc. I have never encountered a parent with more than one child who keeps a ledger for each child from birth and insists upon strict equality in giving.
If one child plays baseball and another plays lacrosse, should the parents make an equalizing distribution to the child whose sport costs less? Most parents would answer, “of course not”. Is the answer tougher if the parent pays tuition for one child who chooses to go to an expensive private college and pays tuition for another child who chooses to go to a community college? What if one child has extensive medical expenses or disabilities or one needs more support in launching into adulthood?
In the estate planning realm, these kinds of questions and even more difficult ones are frequently raised. The interesting and challenging part is that there are no universally right and wrong answers – just right and wrong ones (or better and worse ones) in the judgment of any given parent.
Below, I outline a few common situations that raise questions of equality and fairness, and describe some of the associated estate planning implications.
Loans to children. Suppose you make a loan to a child or you make loans to multiple children but in different amounts. How should a loan be treated upon the death of the parent? While there is no set answer, such loans should definitely be documented.
First, a promissory note should be prepared by an attorney and signed by the child borrower. Second, good records should be kept so that if the parent dies, the then-principal loan balance can be ascertained. Third, it may be helpful if the parent’s Living Trust states specifically what is to happen with that loan receivable upon the parent’s death. For starters, is the loan to be fully or partially repaid or is it to be forgiven?; and if it is to be forgiven, should the amount forgiven be charged against that child’s share of the estate? Without adequate documentation, ambiguities arise and frequently lead to conflict, if not seriously damaged relationships, among the children.
Child Caretaker. Not infrequently, a child becomes a part-time or full-time caretaker for aging parents. In doing so, the child may make substantial personal and/or financial (e.g. employment/career) sacrifices. An estate planning attorney can help parents evaluate the circumstances and navigate reasonable solutions. Again, documentation is critical.
Parents should consider working with their estate planning attorney (and accountant) to draft an appropriate contract under which the child is paid a reasonable wage for the caretaking. If a parent has insufficient liquid assets to pay the child or if the child refuses to take any pay, the parent may wish to include in his or her Trust a cash gift to be made (or a slightly higher percentage of the assets) to such child upon the parent’s death. If the parent does so, it is often helpful if he or she articulates in the document the reason that the children are being provided for unequally. The other children may not like or agree with the stated reason, but at least they will understand why the parent believed the unequal treatment to be appropriate and fair.
Other critical estate planning decisions may be perceived as “unequal” but may be necessary or desirable, such as: i) holding funds in trust until an older age for some children than others; ii) choosing one or several children, but not all, to serve as successor trustee of the parent’s Trust; iii) designating certain specific assets, such as real estate or family owned business interests, to be distributed to the child(ren) who happen to be involved in such real estate or business operations.
Attorneys don’t have all the answers, but one of their most valuable functions is to know what questions to ask and how to guide their clients to answers that work best for the clients and their loved ones.
This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.
Mr. Silverman is an attorney with R. Silverman Law Group, 1855 Olympic Blvd., Suite 125, Walnut Creek, CA 94596; (925) 705-4474; rsilverman@rsilvermanlaw.com.
ESTATE & TRUST ADMINISTRATION: Need to find an experienced estate & trust administrator in Walnut Creek CA? Contact Robert Silverman at 925-705-4474 for legal advice on a Revocable Living Trust, “Summary” Estate Administration, Trust/Estate Beneficiary Representation and Will & Trust Disputes.