Parents often treat their children the same when it comes to distributions of their estate in order to avoid conflict or claims of undue influence. While well intentioned, sometimes parents overlook the fact that distributing their estate equally among their children can still cause their children to feel that they were treated neither equally nor fairly.
For example a couple indicates that they had decided to leave their wealth equally to their three children on their deaths. One of the reasons behind this decision is that their children do not always see ‘eye-to-eye.’ Actually, they feel that their children get along fine; rather, it is their son-in-law and daughters-in-law who are perceived to be meddlesome and disruptive, periodically creating stress in their children’s relationships. Consequently, the parents believe that by distributing their estate to their three children in share of equal value will somehow avoid the conflict that they fear might otherwise arise on their deaths.
The parents think that their estate plan avoids strife or resentments that may arise after their deaths, and have eliminated any threat of probate litigation, merely by giving equal inheritances to their three children. However, with an equal division of their estate on their deaths, their children may still never actually be treated equally.
While the inheritances that the children will ultimately receive under their parents’ trust are described as to be distributed to our children in separate shares of equal value, overlooked in that very simple division is the more complex issue of who has control over the trust and the trust’s administration and assets prior to their distribution to the children. Equality is subjective and means something different to each child, especially children who are emotional and grieving the loss of their surviving parent.
Consider the following the possible inequality in the administration of a trust that directs that shares of equal value of trust assets be distributed to the decedent’s surviving children:
- Naming One Child as Successor Trustee: If parents name their oldest son as the successor trustee of their trust, that leaves him in complete control of all trust assets prior to their ultimate distribution. That role as successor trustee gives to that son control over what bills to pay, what assets should be included in the trust, who to hire to appraise hard-to-value assets, and who to hire as the trust’s attorney and accountant. Only the one son acting as the successor trustee will have access to information with regard to the trust assets, debts, tax liabilities, and claims that the trustee may wish to pursue. Unequal access to information and unequal control of trust assets can easily create resentment among the other children who are beneficiaries of the trust.
- Trustee’s Fee: Since there is much work and responsibility involved with serving as a success trustee, the son might also decide to take a fiduciary fee, which he is entitled to under Michigan law. Taking a trustee fee, to the exclusion of one’s siblings, could easily cause a deterioration of the children’s relationships, leading to the perception that the one son who is named as successor trustee and paid a trustee’s fee will ‘get more’ than the other two children, which is factually correct, while the other children ignore that their brother had to work for that fee–they will just remember that he ‘got more than I did.’
- Trustee Burdens: Being named as successor trustee may also work to that designated child’s disadvantage. If he or she feels guilty, they may refuse to take a trustee’s fee in order to keep the amounts ultimately received by each of the children the same. Yet that same ‘martyr-like’ decision can easily cause the child who acts as successor trustee resentment that he or she is treated unequally, because they are ‘working for free’ on behalf of their siblings. Emotional and mental challenges also go along with the trust’s administration could easily cause the child to take time away from running their own business, or not spend time with their family to grieve the loss of parents, while their siblings are free to get on with their lives without any responsibility for administering the trust and all the decisions that go along with that administration.
- Trustee Liability: There can also be an unequal financial burden placed on one child who serves as successor trustee in light of the personal liability that successor trustee may have if there is later an assertion that federal estate taxes will be due, but all of the trust assets have been distributed. If there are unpaid federal estate taxes the IRS can collect the unpaid taxes, plus possible interest and late-payment penalties, directly from the successor trustee. That exposure to possible liability to the IRS can also create resentment and a feeling that all the children were not treated equally.
- Specific Bequests: Family unit inequality can also result when the grandparents leave a specific dollar amount, e.g. $10,000, to each of their grandchildren from the trust. While that dollar amount bequest looks and sounds fair and equal among the grandchildren, it will not be perceived that way if one child has produced four grandchildren, one child has produced one grandchild, and a third child has produced no children of their own. Family units, i.e. the surviving children, tend to ‘keep score’ and a trust provision that leaves an equal cash amount to each grandchild can easily lead to the perception that the children are not treated equally.
- Distribution of Tangible Personal Property: Most wills and trusts attempt to avoid identifying and dividing smaller items of property by simply stating that the decedent’s tangible personal property is to be divided equally among my children as they may agree. Unequal benefits will inevitably occur in the division of tangible personal property, such as artwork, collectibles, and jewelry. It is probable that the children will end up with different items with different financial and sentimental values. Fighting over the parents’ belongings is often the subject of virulent disputes among the children, even when the value of those emotion-laden items is negligible.
Inequalities can also arise even when the parents’ estate plan directs that each child is to receive the same amount. For example, assume that the deceased parent owns an interest in a closely held family business. The parents’ one son works in the family business.
Control: Upon the parent’s’ death, the son will control the day-to-day affairs of that family business, to the exclusion of his siblings.
Income: The son who runs the business will also continue to receive his salary. If the son’s responsibilities increase on the death of his parent, he might actually increase his salary, commensurate with his increased responsibilities at the business. The son’s siblings may see their brother’s actions as taking advantage of their parent’s death, and indirectly taking advantage of them, even though all are supposed to share equally in the deceased parent’s estate.
Trust Administration: Much of the income that may be required to administer the trust estate and pay federal estate taxes may be dependent upon the business that the deceased parent owned at the time of death. That needed income to pay bills, hire professionals, and pay taxes may be paid from the business, but only if that income is available. The business may be controlled by the son who works in the family business, and the decisions that he makes may result in there not being sufficient business income to help pay estate administration expenses. If there is not enough income, the trustee may have to sell estate assets to raise cash. The other children could resent some of the business decisions that their brother made that, in their view, reduced the amount of income the business could generate and make available to the trust estate.
Buy-Sell Agreements: Another way in which inequities occur is when the parent and one child have entered into buy-sell agreements with regard to the business asset. While distributions from the deceased parent’s trust are directed to be in equal amounts, a pre-existing buy-sell agreement may give a child who is active in the business to purchase his or her deceased parent’s business interest, from their trust, either with valuation discounts, or perhaps at book value as opposed to fair market value, which is the standard used to value the deceased parent’s business interest for estate tax valuation purposes. Either with valuation discounts, or book value purchase options, the one child who is involved in the business will be viewed by his or her siblings as taking advantage of them by purchasing their parent’s business interest at less than its fair value.
These are just some of the examples where children may not feel that they have been treated equally under their parent’s estate plan. Parents who believe that they are treating their children the same need to be reminded of these hidden inequities, real or perceived.