FPA Financial
Planning Perspectives
Provided by
Investor’s Capital Management www.feesonly.com
KEEPING THE PEACE AMONG YOUR HEIRS
A couple of years ago, AARP released a study that found that one in five
people receiving an inheritance battled over it with other family members. The
worst fighters were baby boomers age 50 to 53, with a third of them reporting
squabbles. It doesn’t have to be that way, say Certified Financial Planner
professionals, if the person passing on the inheritance follows a few sensible
ideas.
Plan. Don’t just leave everything
to your heirs in a pile and let them sort it out. That’s how fights start, and
it won’t endear you to their memory. Organize your financial records to make it
easier for your heirs to sort out your estate. Put an estate plan in place,
with an up-to-date will, trusts if necessary, life insurance, probate avoiders
and other strategies. This not only can minimize the estate tax bite, it will
ensure that your estate goes to those whom you want to receive it. For example,
you might want to use a trust to ensure that part of your estate goes to your
children from a previous marriage.
Don’t be secretive. Probably nothing breeds
more animosity—not only among heirs but between heirs and their benefactor—than
keeping an estate plan secret. After you’ve drawn up a plan, consider talking
it over with your heirs. Explain to them why you’ve made certain decisions.
Listen to their feedback. You may want to make adjustments before executing the
documents.
This can be a good time to
talk about who gets or wants certain heirlooms or memorabilia. One of the
biggest battles among heirs is over these items, according to the AARP survey.
Write these decisions out in a letter of instruction that accompanies the will,
explaining who should receive particular items.
Be equitable, not equal. Splitting up your estate
evenly often is the worst thing to do, especially if it involves undividable
property such as a family business, the family farm or the family’s second
home. It’s better to be equitable or fair, but not equal.
Take a family business, for
example. It’s hard enough to keep a family business going into a second
generation without the added burden of splitting it equally among multiple
heirs. Some of them may not want to be involved in the business, may not be
qualified to run it or will battle each other for control. Usually it’s better
to designate one heir to succeed as owner (preferably someone you’ve groomed)
and compensate the other heirs with insurance proceeds, other liquid assets
such as noncompany stock, or even with nonvoting stock in the business itself..
The same principle applies
to a family’s second home, where heirs may squabble over its management and
use. Passing the home on to one heir, but providing equitable compensation to
the others, may alleviate any friction.
Even if easily divided
financial assets such as stock make up the estate, a parent may want to pass on
the estate unequally. Perhaps a child is disabled and will need lifetime care,
or one child is already wealthy while the other is working hard but in a
lower-paying job. Perhaps one child spent a lot of time caring for an ill
parent and deserves extra. Explaining what you intend to do and why in these
situations will likely make it easier for all to accept.
Don’t disinherit. It’s not uncommon for
parents and children to feud to the point that a parent cuts a child out of an
inheritance. Or they may worry that the adult child won’t be able to handle an
inheritance due to a drug or drinking problem, or a wasteful habit with money.
Such concerns often can be overcome with the use of trusts stipulating at what
age the child receives the money, or under what conditions, such as graduating
from college. Simply cutting them out of a will can provoke ill feelings not
only toward you but toward those who inherited.
Understand the psychology of
inheritance.
As strange as it may sound, not everyone is comfortable receiving an
inheritance, especially a large one. Heirs not well prepared for an inheritance
may experience a sense of guilt because they didn’t “earn” the money or are
anxious about how to manage the inheritance. That can cause tension among
multiple heirs. Again, discussing the inheritance in advance will help. Linking
them up with professional advice also can help ease their discomfort.
February 2001— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Rich Chambers, CFP, a local member in good standing of the FPA.
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