Ensure Fairness to all Heirs When Making a Will

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By John W. Powell, Esq.

Successful parents know that treating children equally is often not a matter of giving them all the same thing.  One may want to go to chess tournaments, while another might prefer hockey or golf.  The summer trek across Europe on a bicycle that one teen yearns to complete might cost more than the outdoor camp another craves to attend.  And it would be foolish to set the same school goals for a daughter who always tests into gifted programs and one who is a star athlete with good grades

Estate planning requires the same approach, even for those with estates below the taxable minimum.  Even though it may seem much easier just to split things equally to avoid being seen as unfair by your children, an even split may not be the way to act in the best interests of them and other heirs.

Fortunately, while details may differ in every family situation, at the end of the day many people express similar goals when drawing up their wills and discussing wealth distribution.  Estates and trusts attorneys have therefore developed a number of fairly standard and inexpensive solutions to these generic challenges.

Let’s take a look at a few of the more common challenges people face when making their estate plan, starting with having a child or other heir who is financially irresponsible or hasn’t yet found himself or herself.  Parents may fear that such a child could run through an inheritance in short order and then be left with little or nothing.

Parents interested in protecting such children from their own foolishness can always ask their attorneys to embed a spendthrift trust into their wills. A spendthrift trust is a trust that gives an independent trustee full authority to make decisions on how the trust funds are spent for the benefit of the beneficiary.  The beneficiary has to seek and obtain approval of the trustee to access the money or property in the trust.  The trustee thus can act in the long-term interests of the beneficiary.  We typically recommend that the trustee not be a sibling to the beneficiary.

A spendthrift trust also prevents creditors from attaching the interest of the beneficiaries in the trust before that interest is actually distributed to them.  That means that the trust is not financially responsible for contracts into which the beneficiary may foolishly enter or financial judgments against the beneficiary.

Many well-drafted irrevocable trusts contain spendthrift provisions even though the beneficiaries are not known to be spendthrifts.  The spendthrift provision protects the trust and the beneficiary in the event a beneficiary is sued and a creditor attempts to collect from the beneficiary’s interest in the trust.

Another situation that many parents face is what to do about financing the higher education and other needs of their minor children.  It’s hard to predict what the individual needs of each child could be: One child might get an academic or athletic scholarship, while another doesn’t qualify.  Or one child may pursue a PhD while another goes to a two-year community college or vocational training.  One child could face a serious but costly illness or injury. It clearly isn’t fair to earmark the same amount of money in a will to support the education and other needs of each child or grandchild.

The way out of this dilemma is to create a pot trust. Rather than establish a separate trust for each minor child, the parent(s) creates one common pot from which an independent trustee draws to cover all the educational, healthcare or other expenses of children or up to a defined age. The trustee is not required to spend the same amount on each child, and so can spend extra for the child who is going to law school or needs special medical assistance.  Once the youngest child is of age, the remainder of the pot trust is divided, usually equally among all the beneficiaries it covers.

The key decision to make for both the pot and the spendthrift trust is who will be the independent trustee.  The trustee has the final say on whether and how the money is to be distributed during the duration of either trust, so the trustee must be both scrupulous and knowledgeable of the family dynamics. The trustee must be willing to take the time to understand both the objectives of the trust and the individual needs of each of the beneficiaries.  The trustee’s decisions are not automatic, and can’t be automated.  It is usually a good idea to have a back-up trustee named, especially if the trustee is an individual.

When discussing the creation or updating of an estate plan, it is imperative that you share not just your goals, but also your fears of what may happen after your passing with your attorney.  Once the attorney knows what you want and don’t want to happen with your estate, he or she will be in a much better position to help you reach the goals and allay the fears.

John W. Powell is a partner with Pittsburgh-based Meyer, Unkovic & Scott who often works on estate planning issues. He can be reached at jwp@muslaw.com or 412-456-2830.