Rich kid/poor kid

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 Schwarzenegger 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 financial 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 to simply ignore the
disparities between the children. 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
than you intend. Alternative approach: Make a fixed dollar bequest to poor kid,
and 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 does not 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 than
for my other children.” May sound corny, but the reality is that 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 do not 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
will not 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 worth of 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 may not be Richie Rich tomorrow.

* Buy a life insurance policy 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