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 “Equal” isn’t necessarily “Fair”

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

In estate planning, “equal” isn’t necessarily the same as “fair”. I rarely see an estate plan that does not treat children equally. When I do see inequality, it’s usually because a parent is estranged from one child and leaves him or her nothing. So, “equal” isn’t necessarily “fair”.

Some call this the “placebo of estate planning equality”.

Psychologists

Many experts on the psychology of estate planning recommend that parents divide their estates equally among children. The main reason is to help enhance sibling relationships after the parents’ deaths. The goal is to eliminate the potential for hurt feelings and perceived injustice if parents favor one sibling over another financially.

Estate Division

Dividing an estate into equal shares for each child might seem to be the obvious way to treat children fairly. However, that usually only works if you’ve treated them equally during your lifetime. If you have given more to one child during life, it’s usually smart to level the playing field at death.

The Financial Samurai

I was reminded of this principle late last year in a post by a blogger who goes by the name Financial Samurai, who tells this story:

He perceived that his parents couldn’t afford to send him to a private college. To help them financially, he chose to go to a public university. His younger sister chose a private university costing eight times as much. After graduating, he worked hard to save enough to repay his parents. When he offered them the money, ten years after graduation, he was shocked when they declined it. Only then did he learn they had saved equal amounts for his and his sister’s educations. When he chose the less expensive school, they transferred what they saved on his tuition to help pay for his sister’s more expensive private education.

While he tries his best in the balance of the article to take the high road, assuring readers this injustice really doesn’t bother him, it’s clear that it does, a lot.

“No-Talk” Rules

The amazing thing about this story is that this family never discussed the financial aspects of college. The parents never told their son they were saving for his college education or communicated their intent to pay for it. He never asked, assuming that paying for college was his responsibility. The unspoken “no-talk” rule around money that so many families follow was rigidly in place.

College funding is far from the only way parents treat children differently. Another common one is bailing out one child who has financial struggles, either self-inflicted or caused by outside circumstances. Parents may also lend or give one child some money to start a business. Or they may feel they owe more to a child who has been the one to take care of them in old age.

Many of these inequalities can be compensated for in estate planning. One strategy is to subtract any excess paid to one child from his or her portion of the inheritance. It’s important here to provide for inflation, such as adjusting the amount paid to the child upward by the cumulative increase in the Consumer Price Index (CPI) from the date of the payment to the date of death.

[The “Placebo” of Equality]

Assessment

If parents feel it’s fair to leave more to a child who has cared for them, it’s best to establish that amount carefully, based both on tangible factors like the market value of the care and on intangibles like the relationships among the siblings.

So, no matter what adjustments you make in your estate plan to equalize what children may have received during your lifetime, it’s crucial to talk about those adjustments. Clear communication about what is “fair” goes a long way to maintain strong sibling relationships long beyond the parents’ lives.

Conclusion

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Filed under: Estate Planning, Ethics, Experts Invited | Tagged: CPI, Estate Planning, Financial Samurai, Rick Kahler CFP® | 1 Comment »