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Estate Earmarks | Equitable or Equal?

Estate Distribution Equity vs Equality.jpgEstate planning is for the most part about earmarking a part of your estate for heirs, charities or others that you wish to honor with an estate gift. Baby boomers - my generation - are now spending more time thinking about and doing estate planning - if only to avoid potential litigation down the road.

A basic principle of American estate planning is that your estate is distributed pursuant to law if you fail to create a will or a trust that provides for other distributions. Failure to plan an estate is a lost opportunity to benefit those that you care about.

America's media is full of stories about "the biggest wealth transfer in history is about to happen ... 45 million U.S. households will transfer $68 trillion in wealth over the next 25 years...." As time goes on, there will be more stories of estate plan successes and failures. Estate related litigation is often a result of failed planning - not always - but enough times that some lessons can be learned from the litigation.

While I have done estate planning over the years, our law firm's focus has gradually moved to estate, trust and elder financial abuse litigation. Some might say that such litigation is estate planning gone wrong. That's not always fair - litigation ensues for a variety of reasons - many that I've written about extensively in my book The Wolf at the Door: Undue Influence and Elder Financial Abuse.

Baby boomers contemplating estate planning have many considerations, among them the difference between treating heirs equally or equitably. In many cases the result will be the same - in others not at all.

So, let's just consider a few simple concepts. An equal distribution in an estate plan provides the same quantity or amount to one heir as to another.

Mom and Dad have three children: Johnny, Susie and Max. After Mom and Dad have passed away, their estate is split equally between their three children. If Mom and Dad planned their estate to be equitable, would it or could it be unequal? Well, let's look at some definitions of equitable. We might be chasing our tail a little here. Equitable means fair to all concerned. OK - so what is fair? One definition of fairness is to be free from injustice, fraud, prejudice or favoritism. We're going to see that this is not always easy to apply. But let's look at some instances where we have to think about it.

There are endless possibilities as to the individual and collective lifestyles, mindsets, health, and economic status of Mom and Dad's three children. After litigating hundreds of cases over the years, it's easy to see that even without undue influence, parents can really be challenged as to how to treat their children in an estate plan that is not financially equal. So how does this arise? Well, let's conduct a thought experiment and assign multiple alternative attributes to each of Mom and Dad's children.

Johnny is the oldest of the three. Johnny left high school early because of drug problems or alternately Johnny graduated from West Point and has never experienced any substance abuse issues. Johnny is long married, with children and fully committed to his family and the President of an Insurance Brokerage firm. Or, Johnny is now with a new girlfriend after three failed marriages and sometimes works as a bouncer. Johnny's girlfriend wants him to ask for his inheritance early so that they can lead a happy life in Costa Rica. Or, Johnny and his family live across town from Mom and Dad and regularly visit on weekends. Or, Johnny lives in a trailer in Mom and Dad's driveway and keeps his sister and brother from visiting their parents. You can keep your imagination going, but let's move on to Susie.

Susie is a dutiful daughter who balances her time between her family, her nursing career and assisting her parents. Or, Susie is a drug addict who lost her nursing license because of her abuse and a DUI. Susie began to live with her parents years ago after losing her job and completely relies on them for all of her support. Or, Susie is a teacher who lives in Illinois and regularly visits her parents on holidays and in the summertime. Or, Susie lives with her boyfriend in Texas, has no obvious means of support but has mentioned that she and Festus, her boyfriend, are growing weed.

Now let's go to Max. And, for Max we'll make it a little easier. Max hasn't changed through the years - he was a great student, studied medicine and has been a San Francisco surgeon for many years. Max is married, has children and his family is doing well. Max and his family members stay in touch with Mom and Dad and also with his siblings. That's enough about Max.

So, by thinking of the multiple examples, you can see that an equal division of financial assets won't necessarily help Max that much. Max is set. Johnny could also be financially set, or he could be in great financial danger. If we're dealing with the irresponsible Johnny, it may not be the brightest idea to give him his share outright. You might want a sobriety clause as a condition to trust distribution as well as full discretion in the trustee to withhold or limit payments to him by way of a spendthrift clause.

As to Susie, if she is doing well, an outright distribution to her seems safe. If not so, well then, the same kinds of protection that Johnny needs might also apply. The parents might well take into account all of the money that's been spent on Johnny and his multiple rehabs over the years and decide to limit whatever allocation they make to him.

You get the idea; equal may not mean equitable. Experience counts, and it is my experience that parents need to think about the individual needs of their children. In many cases - maybe most - equal works. In others equal is ultimately inequitable.

Hackard Law takes cases where we think that we can make a significant difference and there is someone who can be made financially accountable for his or her wrongdoing. We litigate estate, trust and elder financial abuse cases throughout most of California's major urban counties including Sacramento, Los Angeles, Santa Clara, Alameda and San Diego.

If you would like us to hear your story call us at 916 313-3030. We'll be happy to hear from you.

Estate Earmarks | Equitable or Equal? from Hackard Law on Vimeo.

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