News & Events

Why Your Estate Plan May Divide Assets Equally, But Not Fairly

By: Mark Eghrari

Elder Law Associates Newsletter dated January 25, 2018

 You do your best to treat your children fairly and equally. That might -- may -- be straightforward when it comes to bedtime or when you decide they're old enough to start dating.

Those decisions can be a lot tougher when it comes to dividing assets – especially a business or family farm.  If you are “land rich but cash poor,” the key is to ensure you divide assets fairly... even if that means assets won’t be divided equally.
 
Here’s an example.  Say you own land worth $1 million and other assets worth another $1 million.  You have four children, and you want to pass on your estate in four equal parts.  Sounds fair, right?
 
You could divide the land into four equal parts, but it may not be easy to divide equally, and some of your children may not want the land.  You could divide the land in half, leaving equal shares to two children and the remainder of your assets to the other two children, but your land still may not be easy to divide equally, plus changes in real estate value over time could affect how equal the asset distribution turns out to be.
 
Keep in mind the same considerations also apply to a business. Your children may have different levels of interest, and it may be difficult to divide the ownership – and responsibilities – of the business into equal parts.
 
So what can you do?
 
One potential solution is to add liquidity to the estate. If you have sufficient life insurance, that increases the value of your estate, which could make a fair distribution possible. For example, a $2 million policy increases the value of the estate to $4 million -- that allows you o give each child $1 million in assets without having to sell or divide the land.
 
Another useful planning tool is a buy-sell agreement, a contract that specifies certain rights among the owners of a family business. If you choose to leave a business to multiple children, a buy-sell agreement can specify who controls ownership of the business, what rights the shareholders have to transfer stock in the business to other people, under what circumstances those rights can be activated, and how those transfers can take place. An effective buy-sell agreement can benefit from tax advantages while passing on your legacy in a structured and way that helps avoid disputes among your heirs.
 
If you're trying to divide your assets equally -- and fairly -- make sure you think ahead about how your assets will actually be divided, and what that means for each child. Equal might not turn out to be "fair" at all.
 
 
Article Source: Forbes