Fair or Equal? Evaluating Different Approaches to Financial Assistance and Inheritance
Money is always a delicate topic in families and no parent wants to play favorites or have it appear that way. However, there are many family situations where one child either requires or would benefit from financial help more than their siblings. This raises the question of whether financial assistance, both in the present day as well as inheritance, should be equal or fair.
Equality is generally thought of in mathematical terms, an exact balance of one-to-one. Many parents want to take an equal approach in providing and transferring assets because it seems straightforward and neutral. Everyone receives the exact same dollar amount. Unfortunately, equality can be hard to implement (constant tallying) and this approach doesn’t account for differences in life situation and needs across a group of beneficiaries.
Fairness on the other hand is not about precision. It is more of an emotional perception about how a set of rules or intentions are applied in an impartial way. Think of sporting events. As long as everyone knows and understands the rules and how they guide decisions and outcomes, the results are accepted. Taking a fair approach to financial assistance and estate planning can better accommodate differences across a group of beneficiaries but it can also lead to bad feelings or conflict when the rules or intentions of how and why decisions are made are not well communicated.
“Rather than letting people come to their own conclusions about the why behind gifting decisions, take the time to clarify intentions directly.”
To look at these approaches in a family situation, imagine that someone has two adult children. One is a highly successful attorney married to someone with equal career success and they have two healthy and thriving children. The second is divorced, a manager at a small non-profit and has two children, one of whom has ongoing physical and developmental health issues. There is no question that the circumstances of the second child create a greater need for financial assistance, at least at present and likely for the future. In a case like this, if the parents/grandparents decide to do more financially for the child and grandchild with more need, they should share their intentions and purpose for doing so early on with both adult children. Even if there is some pushback about the disparity in financial assistance, the parents’ explanation of their decision making will at least be known and (hopefully) accepted in time.
The above example was clear cut and understandable in terms of the drivers in differences in need but in many family situations the reasons behind situational differences are more nuanced or there are other factors involved that can make it harder to justify variations in financial assistance. In attempts to address both situational differences as well as ensure future impartiality, many parents take a middle of the road approach. They assist with varying needs of different children during life (fair) and then leave an inheritance in equal proportions after their death (equal).
No matter the approach, the most important aspect is to communicate and set expectations. Again, the clearer parents are on what financial assistance will be available and for what purposes as well as their intentions in leaving an inheritance, the more prepared family members will be. Having that information prevents misunderstandings and provides beneficiaries with the rationale for how decisions were made. If there are big differences in opinion on this, even if those don’t change the outcome, it can be helpful to acknowledge them so that everyone feels heard.
Ultimately, fair is not always equal and equal is not always fair. Gifts of money, whether now or in the future, are often viewed by recipients as representative of love and trust. Rather than letting people come to their own conclusions about the why behind gifting decisions, particularly if there are discrepancies across inheritors, take the time to clarify intentions directly.
The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice. Although we made efforts to verify the accuracy of the information, Altair Advisers cannot guarantee its accuracy. Please see Altair Advisers’ Form ADV Part 2A and Form CRS at https://altairadvisers.com/disclosures/ for additional information about Altair Advisers’ business practices and conflicts identified.