Estate planning can be a complex and sensitive process, especially when clients have diverse assets to distribute, blended families, taxable estates, children with special or specific needs — the list goes on. While it may seem straightforward when there’s only one beneficiary, things can easily become more complex the more factors you add in. People often find themselves pondering questions of fairness, striving to ensure that their estate plan reflects their intentions. We often hear, “What is fair?” or “How do I make this even?” These questions highlight the importance of navigating the complexities of estate planning and administration with a focus on promoting harmony and meeting each beneficiary’s unique circumstances with clear instructions for your beneficiaries when you are gone.

1. Understanding the Complications

Varied Beneficiaries and Assets:

Clients who have more than one beneficiary and multiple assets encounter inherent complexities. Not only do beneficiaries have differing financial needs, emotional attachments, and personal circumstances, but the assets themselves also come with their own set of challenges regarding liquidity, valuation and sentimental value.

Consider a scenario involving real estate across different states. An adult child living in New York might see little practical value in inheriting a piece of real estate in Washington due to the distance and potential for management difficulties. In such cases, selling the property and distributing the proceeds might be the most straightforward solution, aligning with the beneficiary’s preference for assets that don’t require active management. However, another beneficiary residing in Washington could have a strong attachment to the family home and prefer to inherit the property directly. If the Washington home is the main estate asset, the beneficiaries can fight over an optimal outcome.

Allocating fractional interests in properties or businesses (a share/portion to multiple beneficiaries) can create its own set of problems, from disagreements over management to challenges in valuation. For instance, splitting a vacation home between siblings might seem equitable but can lead to disputes over its use, maintenance and eventual sale. Such arrangements often necessitate detailed agreements to prevent conflicts, yet even the best-laid plans can fall short when emotions and differing views come into play.

Disparities in Lifetime Support:

Invariably, clients have provided varied levels of support to their beneficiaries over the years. This could range from significant financial assistance for one child’s education to a substantial down payment for another’s first home. Some may have received generous gifts, while others benefited from practical help like a vehicle for their daily commute. These differences in support, intentional or not, introduce challenges in achieving perceived fairness within an estate plan. The goal isn’t to enforce rigid fairness but instead to navigate these differences thoughtfully. We guide our clients through understanding the spectrum of fairness — that what feels equitable to one client (or beneficiary) may not resonate with another. This understanding is important in shaping an estate plan that reflects the client’s intentions and respects each beneficiary’s unique situation, past support, and family dynamic.

Beneficiary Circumstances:

Beneficiaries’ individual circumstances, such as tax treatment, family circumstances, financial situations, or involvement in family enterprises, further complicate the notion of fairness. Clients may need to tailor the estate plan to account for these varying factors – both the years spent working in the business by a beneficiary and other beneficiaries’ perception that income paid for that work is sufficient recompense. Also, addressing disparate income tax rates and recognizing caregiver beneficiaries are crucial considerations to ensure fairness and equity. Oftentimes, we see this debate when a beneficiary has provided significant care for their parents during end of life which has resulted in significant sacrifices for the adult child.

2. Strategies for Planning Fairness

Accounting for Loans and Financial Gifts:

When it comes to managing loans or financial assistance within an estate, clarity and documentation are paramount. If a client has extended loans to certain beneficiaries, the estate plan should explicitly state how these loans are to be handled at the client’s death — whether they will be forgiven or deducted from the beneficiary’s inheritance. This approach avoids leaving room for interpretation and potential disputes. For financial assistance intended as gifts, documenting these transactions as such will clarify the client’s intentions and prevent misinterpretation as loans.

For example, if a parent assists a child, Alex, with purchasing a home and intends this as a gift, it should be clearly documented to prevent any sibling from later claiming it was a loan that should reduce Alex’s share of the estate.

Balancing Probate and Non-Probate Asset Distribution:

An often-overlooked aspect of estate planning is the need to balance the distribution scheme between probate and non-probate assets. Probate assets are those that go through probate, while non-probate assets are transferred directly to beneficiaries outside of probate (e.g., life insurance policies, retirement accounts with designated beneficiaries, jointly owned property with rights of survivorship). If the will divides the estate equally among the beneficiaries, but only accounts for probate assets, beneficiaries named on non-probate assets could inadvertently receive a disproportionate share of the estate. To prevent such imbalances, estate planners should meticulously align beneficiary designations on non-probate assets with the distribution objectives outlined in the will or trust.

3. Ensuring Smooth Post-Death Allocations

The implementation of the estate plan after the client’s death requires careful attention to asset selection and valuation. Here are some important factors to consider:

Asset Selection:

Clearly expressing the client’s intentions regarding the selection of assets for specific beneficiaries is crucial. Whether it is a particular asset intended for a beneficiary or an order of priority for asset allocation, transparency and clarity are paramount.

Valuation Considerations:

Valuing assets for distribution can be challenging, as fair market value may not reflect the sentimental or economic value to beneficiaries, especially when co-ownership is involved. Clients should consider provisions that account for such considerations, allowing beneficiaries to purchase assets at fair market value or address discounted fair market values.

Business Interests: In cases where the estate includes a family business, clients may want to consider allocating governing interests or disproportionate economic interests to beneficiaries based on their involvement in the enterprise. This approach aims to maintain the continuity and viability of the business while ensuring fairness among beneficiaries.

Real Property: Real estate assets, especially those with recreational or sentimental value, can pose challenges when it comes to distribution. Co-ownership of such properties may lead to conflicts and management difficulties. Clients should carefully assess the feasibility of co-ownership and consider alternative solutions, such as selling the property and distributing the proceeds proportionally among beneficiaries.

Conclusion

In the realm of estate planning and administration, achieving fairness among beneficiaries is a complex task. It requires careful consideration of the unique circumstances of both beneficiaries and assets. By understanding the difficulties and employing strategies such as accounting for lifetime support, addressing beneficiary circumstances, and incorporating clear directives for post-death asset selection and distribution, clients can better achieve a fair distribution.

In the end, planning for fairness requires a balance of legal considerations, communication, and an understanding of the clients’ objectives and the needs of their beneficiaries. With careful thought and guidance, clients can create estate plans that promote fairness, harmony and a lasting legacy for their loved ones.

— By Nicole K. Betts

Would you like to learn more about Salish Elder Law? Contact us here:

Salish Elder Law

51 W. Dayton St., Suite 204

Edmonds, WA 98020

425-492-7212