Deciding how to divide assets among heirs is one of the most challenging aspects of estate planning, especially when the estate includes complex holdings like real estate, family businesses and investments not easily divided, according to a recent article from GO Banking Rates, “I’m a Financial Advisor: Here’s How to Equally Divide an Inheritance Among Heirs.” Navigating this process is something you want to get right the first time to prevent heirs from becoming embroiled in family fights and, worse, litigation.
The first decision is whether the goal is equal or equitable distribution. Equality means that everyone gets the same inheritance, regardless of their situation. Equity is a bit more challenging, since everyone inherits what they need to succeed, and chances are that each of their needs are different.
Considering the needs and individual circumstances could be a more suitable way to help your heirs.
Consider one adult child who enjoys good health, and owns a business and a mortgage-free house, while their sibling cannot work and depends on government benefits. An equal solution would split the inheritance equally, but in an equitable distribution, the child who can’t work would receive more financial support and a Special Needs Trust to protect their benefits.
Trusts are the preferred method of estate planners because they bypass probate, offer tax advantages and protect assets from creditors. They also allow grantors to ensure distribution as desired. Trusts can be revocable or irrevocable, living or testamentary, and can be designed to include custom rules to suit any situation.
However, there are two asset classes presenting challenges to distributing equitably, even with a trust.
Distribution of complex holdings like real estate property and family-owned businesses requires considerably more planning than simply splitting a bank account. Consideration needs to be given to the dynamics of beneficiaries and what potential issues may arise.
In the case of a family business, the challenge is deciding whether or not to liquidate the property and distribute the proceeds or determining how to establish ownership among the siblings.
If one or more heirs want to continue to own the business and others do not, a buy-sell agreement will be needed so they can buy the other’s shares at a predetermined price, thereby ensuring all receive fair compensation. A professional appraisal will be critical to establishing the current market value, ensuring fair distributions.
Another way to resolve this is to create a Family Limited Partnership (FLP) to maintain control within the family, while distributing profits equitably.
What if heirs want vastly different outcomes, and you’d like to simplify matters? One answer is to have crystal-clear language in your will stating if beneficiaries can’t reach an agreement on what should happen to the business, it will be liquidated and the proceeds divided.
An experienced estate planning attorney will help determine the best way to achieve your goals based on your family’s situation and your wishes.
To learn more about estate planning in the East Valley, Gilbert, Mesa and Queen Creek, schedule your free consultation with Attorney Jake Carlson by using one of the links above.
Reference: GO Banking Rates (June 8, 2023) “I’m a Financial Advisor: Here’s How to Equally Divide an Inheritance Among Heirs”