Preferring One Child Over Another

As George Orwell wrote, all are equal, but some are more equal than others. In the context of wealth planning, not all children are created equal. Not equal in abilities. Not equal in interests. Not equal in the eyes of their parents.

In four segments, I’ll attempt to address the range of considerations given by a parent to an unequal distribution of wealth among children. The same could be applied to an aunt benefitting nieces and nephews or any other situation where there are two or more heirs to an estate. This issue of unequal distribution will likely arise only to assist a child at a financial disadvantage or to address a significant inconsistency between children. Should you feel lost in this discussion, go watch the movie “Rainman” which explores this topic.

When considering how to pass on an estate, many will divide their wealth in equal shares among their children. But that might not work well for the child with other abilities, or a history of addiction, a child that has suffered financial setbacks, or a child who has devoted their life to charitable work. Another factor causing a diversity of opinion about children’s inheritance is their choice of partner or spouse. Perhaps the difference is the relationship between parent and child. Often parents want to reward the child who becomes caretaker as opposed to the child who has moved far away and visits rarely.

Let’s take an example. Mrs. Moskowitz has four adult children, three sons and one daughter. The daughter, Diedre, has suffered from a debilitating illness and can no longer work. While her life expectancy is average, her mental faculties are diminished due to coping with illness. The other three children are well situated. Mrs. M wishes to be evenhanded but also sees a need to give preference to her daughter.

For the estate planner, the obvious solution is to use a testamentary trust. The testamentary trust is created upon the death of the grantor, in this case Mrs. M. The trust allows the deferral of the estate’s complete distribution. All or a portion of the estate can be held in trust after Mrs. M’s death. Drafting the trust document offers the opportunity for creativity.

The most important question is the beneficiaries. There are both income beneficiaries and remainder beneficiaries. For example, one child can be an income beneficiary and the others can receive funds from the trust when the trust terminates as remainder beneficiaries. The income beneficiary can receive only the income from the trust assets, or principal distributions, or both. Distributions can be limited to a standard, such as for health, maintenance and support.

In part two, we will explore how Mrs. Moskowitz fashions a trust that will disproportionately benefit her daughter over other children.

Evan J. Krame