Melissa A. Seamon, CFP®
Do You Have to Divide Your Estate Equally Among Heirs?
The short answer is NO!
Estate planning is a broad subject with high stakes and seemingly unending nuance. It can also be the cause of much stress, grief, and headache—especially when it comes to dividing it up amongst heirs.
When you pass away, your estate will be distributed among your heirs, but it doesn’t have to be in equal amounts. Some folks choose to divide it equally, but many have other plans.
What other options are there? And which is the best for you?
This article will dive into the differences between an equal inheritance and an equitable inheritance, as well as reasons you might consider one approach over the other.
What is an Estate?
First, let's touch on the basics. An estate consists of all the assets and property a person owns when they pass. This includes bank accounts, real estate, stocks, bonds, vehicles, antiques, and more. It also includes less tangible assets such as intellectual property or life insurance policies.
How is an Estate Divided?
When someone dies, their estate is distributed among their heirs. This is done in accordance with the deceased person's will. If they did not have a will, it would be distributed in accordance with intestate succession laws, which are state laws that dictate the settlement of an estate in the absence of a will.
Generally, an estate is issued to the surviving spouse in the absence of a will. If there is not a spouse, it would be divided equally among heirs. However, there are definite variations based on your state and circumstances.
To ensure your wishes are met and to minimize issues and disagreement over the settlement of your estate, it is best to have a will. This will allow you to dictate who receives what. It also opens the door to leaving an inheritance to individuals outside your family, such as friends and charities.
Now, let's get to different approaches to consider: equal and equitable distribution of the estate.
As the name suggests, equal distribution of an estate means that each heir receives the same amount of the estate. This is a straightforward and uncomplicated way to divide an estate. It is also fair in that everyone receives the same portion.
There are some potential benefits to this approach:
- It is simple and easy to administer.
- There is no favoritism or bias shown to any heir.
- All heirs receive the same benefits, regardless of their relationship to the deceased.
On the other hand, there are some potential drawbacks:
- The estate could be divided into so many small pieces that it is not worth much to anyone.
- Heirs may have varying needs and be at different places in life- an independently wealthy heir may be resented by a sibling who is struggling financially, for instance.
- It can be difficult to fairly value tangible assets as some individuals may more heavily consider sentimental value, others may prefer to wait to sell until market conditions improve, etc.
As opposed to equal distribution, equitable distribution allows you to take into account the individual circumstances of your heirs. This might include their age, health, financial and family situation, and more.
When you choose equitable distribution, you are not required to divide the estate equally among heirs. Instead, you can distribute it in whatever way you choose, typically on a percentage basis.
There are some potential benefits to this approach:
- You can tailor it specifically to the needs of your heirs.
- You can leave an inheritance to individuals outside your family, such as friends and charities, and exclude individuals as you wish.
- It is more flexible than equal distribution in that you can leave specific dollar amounts or a percentage of your estate and define who receives individual material objects.
Just as with its counterpart, equitable distribution does have potential drawbacks, too:
- There can be more complexity and confusion when administering an estate this way.
- Heirs may feel they did not receive their fair share as it is inherently "uneven."
- There is more room for disagreement or discontentment as heirs may feel they were not considered individually or that their inheritance is indicative of their relationship with the deceased.
Protecting Your Wishes
Estate settlement is an emotional process, and sometimes it can get contentious. If you have children or other heirs who are not on good terms or opt for equitable distribution, the chances of having your will contested may increase.
To avoid this and to ensure that your wishes are carried out exactly as you intended, there are a few steps you can take even beyond the basic step of having a will.
1) Choose an Executor
First, make sure that you choose an executor who will be fair and impartial in carrying out your wishes. This person will be responsible for dividing the estate based on your instructions and will have a great deal of power in doing so. If you have specific wishes regarding the distribution of your estate, convey them to your executor and document them. This can help avoid any confusion or misinterpretation on the part of your executor.
2) Speak with Your Heirs Ahead of Time
Depending on relationships, another thing to consider is open communication about your wishes before your passing. You don't need to get into the details, but you can make your heirs aware that you have been thoughtful and intentional while planning your estate.
3) Consult Your Attorney and Financial Advisor
Finally, it is always a good idea to speak with an attorney and a financial advisor before finalizing your will. These two professionals can help you make sure that your estate plan is sound and will meet your specific needs.
In the end, it is important to weigh the pros and cons of each approach and make a decision that best suits your family and their needs. Whichever route you choose, having a will in place is the first step to ensure your wishes are carried out. These are your final wishes, and you deserve to have them carried out as you intend.
Once Is Not Enough
Estate planning is a core fundamental in any comprehensive financial plan. Luckily, most of the heavy lifting is done up front when the documents are drafted. But, as life changes, so too might your wishes. Be sure to revisit your estate plan once every five to ten years to ensure it is up to date and reflects your current intentions.
At Gardey Financial Advisors, we work with our clients to ensure this vital component of their financial plan is updated per our clients’ wishes. There is nothing more frustrating to a family grieving loss than trying to untangle an incomplete estate plan on top of it all.
For more information about the comprehensive planning services we provide, we encourage you to take a look around our website, www.gardey.com, and see if we could be a good match. Then, schedule a call with one of our advisors by calling us at 1-800- 550-3880. We’d be happy to meet with you. We best serve clients looking for exceptional client service, who value a long-term partnership, and have a minimum of $500,000 in investable assets.
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