Splitting an Inheritance Between Your Kids

Over the next 20 years, Baby Boomers born between 1944 and 1964 are estimated to transfer $68 trillion in wealth to subsequent generations as the most significant amount of money in American history (which is precisely why this is referred to as the “Great Wealth Transfer”).

Fueling this next generation of wealth are nearly 6 in 10 parents who plan to leave inheritances to their kids—per a recent Merrill Lynch study—because “it’s the right thing to do.” While this approach is admirable—especially for those who want to protect their legacy and provide security for future generations—it’s not always simple to implement (especially when you have more than one child, each with different circumstances).

For example, splitting the inheritance among children on an equal basis is often the right approach—and it very well may be. However, what happens if you’ve financially supported one of your kids longer than the others, one child is wealthier or has more children than the others, or one has stepped up to provide a higher level of care for you as you’ve aged? In these circumstances, the same study found that two-thirds of Americans believe an uneven inheritance split is the right way to go. Regardless of your approach, you want to ensure your inheritance won’t cause discord amongst siblings: especially the type that can create a lifetime of friction.

This post will share strategies to divide your assets in ways that won’t divide your family.

Chat with your adult children

For starters, address the topic of death and your estate with your adult children while you’re healthy so that your intentions are clear and precise. Otherwise, they may misinterpret your plan (e.g., “Mom or Dad would have wanted this”), which can significantly increase the likelihood of sibling disagreements.

It’s also helpful to realize you’ll need more than one conversation to get everyone aligned; a recent Ameriprise survey found that 70% of siblings who fought about money as adults did so due to issues with their parents regarding the distribution of an inheritance.

This is precisely why we often recommend taking this process one step further and involving your adult children before making any final decisions: paving the way for ongoing conversations, smoothing out any differences, and ultimately enjoying peace of mind knowing you’ll minimize or even eliminate any potential lingering discord between family members after you’re gone.

Talk through items your kids may not want

You may assume your prized possessions will be as valuable to your children as they are to you. The reality, however, is that your heirs may in fact not want these items. One typical example is your family home. If you’ve lived in the same house for decades and created a lot of memories therein, the home certainly carries sentimental value but is likely not practical for an inheritance: as it is challenging, if not impossible, to share (unlike a bank account). Related questions such as who is responsible for maintaining the home or what happens if one child gets more use out of the same can arise. If one of your kids wants to purchase the home, at what price do you sell it?

If you leave behind a home upon your passing (rather than, let’s say, those who spend their final days in a nursing facility in the absence of home ownership), one solution is to have your kids sell the home and split the proceeds evenly. While this option may work for many, you’ll need to remain mindful of unique financial circumstances: which may prompt one child to sell more quickly than the other(s) feel is necessary, perhaps due to a declining housing market, etc.

If one of your children does want the home for practical reasons, you’ll need to determine the dollar value of the house and then equalize the value of your other child(ren)’s inheritance. You can use money from savings accounts, investments, or even life insurance policy proceeds to accomplish this.

Beyond just your home, your children may also not want your collection of books, china, sports cards, antique furniture, or any other collectible you may own. Whether or not they are worth money isn’t the point in this case; these are/were your hobbies, not those of your heirs. Therefore, the odds your children will want these items are pretty low, and selling them on eBay or via a garage sale may make the most sense.

Determine how to split assets your kids do want

The objective here is to determine what’s equitable for each child; but remember that definitions of what’s “fair” often differ. For some, this is an equal split of assets. For others, they may feel entitled to a larger slice of the pie for a specific reason (as family business operators, for example).

A rule of thumb is that if all children are minors, similarly situated in life, and/or no longer rely on you for money, an even split is often the most logical approach. Conversely, if you have a child who can’t care for him/herself, a child who struggles financially, or have given one child considerably more money than others during your lifetime, leaving different amounts is likely the right path to take. Remember, of course, that your love for your children is equal and you’re merely treating each one uniquely based on individual circumstances; so never feel guilty if an uneven split makes the most sense given your situation. Let’s get more specific and run through a few common scenarios if this is in fact the case.

If you have a special needs child or a child with a disability, an intelligent approach is to determine how much income he or she will need to last a lifetime as an inheritance. Other children can then split up remaining assets.

If one child struggles with drug or alcohol addiction, it is sometimes wiser to set up a living trust (rather than a will) with substance abuse provisions for when he or she gets sober. Standard conditions can include drug testing as a distribution prerequisite or even staggered distributions dispersed at specific ages. Until these criteria are met, you can give more to your other kids.

A trust can also help in the event one child lives beyond his or her means and thus won’t receive an inheritance outright. In these situations, consider establishing a trust for all children so everyone feels they’re receiving fair treatment.

Let’s also consider the earlier example wherein one child has, for several years, worked for the family company. In this case, it may seem unfair to split the value of the business with siblings: especially if others have zero interest in running it. In these circumstances, a life insurance policy equal to the company’s value (or twice the value, if you’re splitting assets among more than two children) can help make the split more equitable.

Finally, you may find some assets more challenging to split or even the entire process overwhelming. In these situations, finding an objective, third-party mediator—such as a financial planner or attorney—can help spark creative ideas as he or she guides you through the process.

Get everything in writing

Once everything is finalized, you can employ a will or trust to help ensure your assets are protected and properly bequeathed to your heirs. While we won’t dive into the details of these documents here (click here to read more about them), remember there are various types of each and distinct reasons for choosing one over the other (or, in some cases, both).

In sum: final thoughts about splitting assets between siblings

By now, it’s easy to see how this is often a challenging (or even daunting!) process: especially as children get older and circumstances become more complicated. However, communicating why you’ve made (or plan to make) specific decisions in this regard will help minimize or even eliminate any discord among siblings or other family members set to inherit your assets. Don’t just take our word for it; according to The Williams Group—a family wealth transfer research organization—60% of failed wealth transfers result from breakdowns in communication. Prioritize these conversations, accordingly.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.