What is “fair” in estate planning?

How should you divide your estate amongst your children, grandchildren and others?

We are often asked to comment on whether clients have divided up their assets fairly in their wills. One thing we have learned over the years is that there is no agreed formula for fairness, and everybody needs to decide on what they consider to be fair.

There are two prevailing views of fairness in estate planning:

  • The “equal shares” rule. Each child receives the same amount (in inflation-adjusted terms, if lifetime gifts have been made), and it is accepted that the children might spend the money on different things. A gift made to one child now might be balanced out by another child receiving a more significant percentage of the estate on the second death.
  • The “fair but not equal” rule. Each child receives a differing amount, according to a perceived need. For example, one child may have married the son or daughter of wealthy, and generous parents, whereas another child might be single and unable to work. The second child would receive more financial assistance than the first, in this case.

The first rule appears to have the benefit of simplicity and it seems instinctively right, but it only works if each of your assets is split equally across your children (otherwise you may be creating inequality as a result of tax treatment or liquidity), and this might not be what you want – particularly where family companies and second properties are concerned.

It is, of course, made more complicated if we are dealing, as we often are today, with families where there has been a marital breakdown in the past. What is deemed to be fair by an individual may not necessarily translate to equal, and the giver’s interpretation of what’s fair may not be in sync with the children’s or other beneficiaries’ point of view or expectations. These inconsistencies may be the source of significant resentment and family conflict in the future, if an individual feels they have been slighted or have not been adequately provided for.

The decision not to split your assets equally between your children is likely to be based on a variety of considerations and assumptions, such as the circumstances of your intended beneficiaries, family dynamics, current situations, financial needs of younger family members, relationships… the list goes on. Any combination of these factors may result in a choice to split wealth in a way which is fair, but not equal. The fluidity of modern family relationships means that it is increasingly popular to opt for a “fair but not equal” distribution of the estate.

When considering how to work out what is fair, we would suggest that you consider the following factors:

  • Blended families. When there are step-families (or any other variant of the nuclear family), the lines are often blurred as to what is deemed to be either fair or equal, and there may be competing priorities within the family. Intentions to equalize certain family members may often be complex, as some individuals feel strongly about providing for their children from their previous relationship but not for their stepchildren, for example. In this situation, defining and discussing your intentions takes on a heightened level of importance.
  • Lifetime gifts versus inheritances. When trying to ensure fairness, significant lifetime gifts should be factored into the equation. Inequality among your children may have been created from lifetime gifts or support and it’s something that may create resentment or conflict if overlooked in your plans.
  • Varying financial situations among children. This is a common challenge often faced by those who are planning to give wealth. For example, one child may have a wealthy spouse (or a spouse with wealthy and generous parents), whilst another may not have a spouse or partner at all. And it’s very unlikely that your children will each give you the same number of grandchildren. The range of ages of your children might also be very large, and this can mean that some children are more dependant on you than others. In these types of situations, it’s important to define what fair means to you, whilst at the same time recognizing that there’s no way of knowing what each child’s situation may be in the future.
  • Disabled dependant. If an individual has a child who is disabled or who needs more assistance than others, this represents a situation where fair doesn’t have to mean equal.
  • How are the assets taxed? When dividing and directing assets during estate planning, it’s important to consider the tax impacts. While some decisions may seem equitable on the surface, tax implications may throw off that intended balance. For example, no inheritance tax is paid on pension funds on death, so the value of a pension fund may be much higher than an equivalent investment portfolio outside of a pension.  
  • Liquidity of assets. Some assets can easily be turned into cash, whilst others may take a lot of time to be sold (and that may not be the intention). Shares in family companies may have a value, but it may be difficult to realise that value. The UK property market moves much more quickly than that of other countries (e.g. France or Spain), and this can even result in an equal distribution being seen as unfair.

It is likely that your estate will include assets that can create inequality and these should be taken into consideration as part of your estate plan.

First and foremost, it’s important to differentiate between what’s fair and what’s equal as it relates to your unique situation, and then structure your decisions to take that into account.

Clear communication about the reasons for the decisions you have made is an essential part of the process of minimising family conflict, as it removes unanswered questions around why decisions were made. This can be particularly important when lifetime gifts have been made.

Many US family advisers recommend that you explain your view of fairness during your lifetime, and this can be helpful. It allows children to communicate their interest and concerns, which may actually improve decision making or provide a perspective which you might otherwise have been aware of. It also removes the element of surprise on death, and allows feelings to be dealt with upfront. However, we aren’t American, and we find it more difficult to discuss money than sexuality or mental illness, so this might be a step too far for many.

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner

The Financial Conduct Authority does not regulate some aspects of Trust, Tax and Estate Planning.

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