Fair Not Equal
Considerations for Drama-Free Family Wealth Distribution
For those who have been good stewards of their financial resources throughout their lives, one inevitable result is that there will be money left over to distribute at the end. Although a life well-lived implies that we have consumed enough to deliver a fulfilling and comfortable life for us and those we care about, a plan that considers longevity will result in residual assets... what happens to these assets is entirely dependent on how intentional you were with the distribution game plan, and whether you formalized those intentions with a carefully crafted estate plan.
I would add that the story doesn't end there. You would be forgiven if you assumed that a formalized estate plan was all that is required for a successful wealth transition, as this is certainly the foundation piece; however, the often overlooked element is communicating your intentions with those impacted by that plan.
And this is where it gets interesting because the vast majority of families that I have observed in my career underestimate the importance of transparency in communicating estate intentions.
This may be partly rooted in historical and cultural norms where the 'reading of the will' was the formal ceremony often associated with the passing of a loved one; and in most cases the first time estate intentions were exposed for all to see. For many families, discussing any money matters in the open would be considered bad form or rude in some cases. This perception can get in the way of healthy dialogue and can contribute to misunderstandings or hurt feelings down the road.
Rethinking the Timing of Inheritance
Most parents face a delicate balancing act when considering wealth distribution while ensuring their own financial needs are covered throughout retirement. In fact, I encourage our client families to also consider their financial 'wants', which is equally as important as their 'needs'. Once 'needs and wants' are satisfied in the context of the plan, it is time to shift focus to how wealth can be optimized for the benefit of the broader family.
Traditionally, most people have assumed that this benefit be conferred to their loved ones upon their passing. I would argue that the timing of this benefit will in many cases be mis-matched with the beneficiaries' time of greatest need. I have witnessed many scenarios whereby a client's enormous wealth stays effectively locked up while adult children struggle financially, only to be 'rewarded' after they have put those stressful years of peak challenge behind them.
Bill Perkins, the author of 'Die with Zero' writes:
“If you give generously when you’re alive, then I can consider you selfless. If you’re dead, you just don’t have that choice. So by definition, you cannot be generous when you’re dead.”
The build-up of wealth during one's lifetime is the result of sacrificial savings. This means that we deprived ourselves of the spending power of money early in life to presumably enjoy at a later point in life. Sadly, wealth that is passed along after our passing implies a missed opportunity, and wasted sacrifice.
Again, the challenge with generous intentions for distribution of wealth at death is the ability to match the benefit with the need. In many cases, gifting through the estate is simply the default as it is the easiest plan to administer; it requires no additional thought or effort in developing an intentional distribution plan for your wealth.
The Challenge of ‘Fairness’ in Wealth Distribution
For families that choose to leverage their financial resources for maximum benefit, the question of 'fairness' is often the biggest obstacle to actually moving forward with an intentional distribution plan; in many cases this leads to the default position described above – leave it all to the estate.
This hesitation on the basis of 'fairness' is understandable, given that it has been drilled into us since we were children. If Johnny gets a bigger piece of pie than Susie, then the response is predictable - "That's not fair!". If Susie gets 5 minutes of time on the trampoline, then it's only 'fair' that Johnny gets 5 minutes as well.
In these examples, we make no distinction between 'fair' and 'equal', and perhaps mistakenly assign an equivalence based on ease of application. Equal is easy, and as a parent of 3 children I can attest to the reluctance to enter into expanded conversations around fairness when equal gets the job done.
As our children grew older, my wife and I did need to recognize differences in life stage when applying rules for the household. For example, when imposing a curfew for an 18 year old that was different than that of the 13 year old, the treatment was clearly not equal, but easily justified as 'fair' when considering their respective ages.
I think this 'stage of life' framework is also useful when considering fairness in providing financial support to adult children. I also believe we should avoid using age as the best means to assess life stage, as there can be distinct differences in need based on the meandering paths of each child, and the differences in timing of significant life events.
The Role of Transparency in Financial Support
Where transparency is important in minimizing estate squabbles, it is equally important in plans to provide support to children while you are alive. Intentional giving or support strategies require open dialogue with the entire family to avoid misunderstandings and perceived favoritism. This upfront communication is also a great opportunity to impart the guiding principles of support; namely that it won't involve a rigorous accounting of the 'nickels' to achieve perfectly equal distributions. This is a fool’s game that is impossible to achieve based on the time value of money, the nature of the support, and the relative financial resources available to each child.
Fairness is subjective, and I have made a great effort to convey to my own adult children that support will be there for those in need, when they need it. Over the course of time, the balance in support tends to 'come out in the wash'. In cases where there are significant discrepancies, estate equalization can be used as a tool to achieve a result that is fair.
Although fairness as a construct can be useful in family discussions, it should be acknowledged that it isn't without limitations. As an example, blended families can be subject to dynamics that lead to unjust outcomes in the pursuit of fairness. Whether it be the unintentional 'dis-inheriting' of a branch on the family tree, or the intentional use of the word to shut down perceived dissent, care must be taken in applying fairness fairly.
In some cases, families will employ a 'ledger' approach to provide evidence of fairness over time. Financial support for family members of any form (down payment on a home, gifting of a vehicle, wedding expenses, etc...) are added to the ledger, and used to keep track of the relative balance amongst siblings and/or step-siblings. This can work well when there is transparency and good dialogue; however, some parents adopt a 'my money/my choice' approach where there is no transparency, and suspicion and resentment are often times the result.
Progress Over Perfection
There is no 'one size fits all' approach to wealth distribution. Acknowledging this in open discussions with family members is essential. I believe the call to action here is to initiate this dialogue; whether it be a facilitated family discussion using a third party advisor, or an informal conversation where healthy and open dialogue already exists, the 'chat' needs to happen.
As in many cases, perfection is the enemy of progress, so don't obsess about identifying the perfect model. Far better to serve up a menu of different models and options, and simply read the room. A skilled facilitator will be able to tease out hidden concerns and anxieties that can be acknowledged respectfully and without amplifying any pre-existing suspicions. With this input, the family can lean into a preferred approach, or a hybrid model can be designed to address more diverse interests.
With these principles of fairness outlined and put into plain view, it is far less likely that there will be push back or discord between siblings. And while there is no such thing as perfection as it relates to wealth distribution, moving forward with intention and transparency means that the sacrificial savings of your early years will not be 'wasted', but rather applied to their best and highest calling in the here and now.
