Rich Kid; Poor Kid

Summary:

Estate planning when you have heirs of significantly
different means can be quite a challenge. When your kids are the financial
version of Danny DeVito and Arnold Schwarznegger in the movie Twins do you bequeath
assets equally? If equal is not equitable, do you use a different non-equal
approach?

* Rich Kid; Poor Kid: What
to do when your children have very different situations? Most parents still
leave everything equally. “They’re both our children”, “We love them the
same”…. Are all common refrains. So perhaps the most common approach is the
disparities between the children are simply ignored.  This ostrich approach to a tough issue has one major
benefit, it is simple.

* Leave the child in
greater financial need a larger bequest in your will. For example, bequeath 40% to
the rich kid and 60% to the poor kid. A problem with this approach is that if
there is a major change in the size of your estate the percentages may be more
or less of a differential then you intend. Alternative approach: Make a fixed
dollar bequest to poor kid, then leave the remainder of the estate in equal (or
other percentages). Depending on the circumstances, you might feel this
approach takes the sting out of the difference because the residuary (what is
left after the dollar bequest) is divided equally between the children.

* Use Bactine! Remember,
unlike hydrogen peroxide it doesn’t sting. Add a statement to the will to the
effect that: “I have made a larger bequest to my son Sam, out of consideration
for his greater financial needs, and not in any way to indicate greater lover
or affection for him then for my other children.” May sound corny but the
reality is most heirs equate love and money, and saying it “ain’t so”, even if
you think it is obvious, can take the sting out of unequal bequests. Just be
careful how you word such “fuzzy” provisions, you don’t want to create a
condition that could affect the distribution, or raise the likelihood of one of
the children challenging the will.

* Leave the child in greater financial need more assets, but endeavor
to minimize offending the wealthy child by making the disparate transfers less
obvious. Avoid an “in your face” bigger bequest in your will.

* Set up 529
plans for the poor child’s
children to alleviate the college cost burden. These gifts are made outside
your will, and if under the annual exclusion amount ($12,000 in 2008), they
won’t appear on a gift tax return. You might wish to avoid the front loading of
529 plan gifts (you’re allowed to make 5 years gifts at once) to avoid a gift
tax return that would advertise it. Another plus is that if the child in
greater need has more children there is a sense of fairness to defraying
college costs. These gifts, while they directly benefit the grandchildren, can
defray substantial costs for the child/parent. Importantly, if the financial
tides shift, you can reclaim some or all of the 529 plan funds as the account
owner for the plan. This is a key point many people planning for heirs of
disparate wealth overlook, financial tides can be fickle. The kid worth
mega-bucks today could be holding a pay telephone empire, or a patent for
rotary dial phones. They might not be Richie Rich tomorrow.

* Buy a life insurance
naming the poor child as the owner and beneficiary. This can minimize the tax
costs of disparate gifts, avoid an obvious affront to the wealthy child, and
accomplish your goals.

* Buy an annuity in the
name of the poor kid using annual exclusion gifts. This can be a way to assure a cash flow overtime.
If the poor kid is irresponsible use a trust or a non-cancellable annuity.

* Set up a joint bank or
brokerage account with the poor kid that transfers on death automatically and
leave everything under the will equally. You can always change the account if
circumstances change. But if your estate is over the state or federal estate
tax filing threshold this asset, and its disposition will appear on an estate
tax return.

* Use a “pot” or “sprinkle” trust to
distribute based on need. If the “rich” kid stays rich an independent trustee
can distribute more to the poor kid. If the rich kid develops a health problem
or business set back, the independent trustee can easily modify the
distributions. A variant of this is to say leave 40% to rich kid, 40% to poor
kid, and 20% to a trust for all heirs with an independent trustee able to
address circumstances over time.