One of the hottest issues that parents debate is whether to leave the estate equally to their kids when unequal may actually be more fair. I have addressed this dilemma numerous times in this blog, but I go back to the issue because it keeps resurfacing. The feedback I get continues to provide more color for our consideration, so I want to share a bit more.
My latest post on this topic received a lot of attention from the TIGER 21 community, an international network of 1,900+ peers who come together to learn from each other. I have been a member for 15 years and am honored to serve on the national board. The TIGER 21 Family Network asked me to conduct a one-hour “Tiger 2 Tiger Salon” on this topic. As preparation, I organized my thoughts in a White Paper on this topic. I will recap it here, or click on this LINK to read it all.
In my paper, I frame the issue this way (borrowing a concept from my colleague Jeff Savlov, a family and business counselor I greatly respect). You have three kids, so you slice the pie into three equal pieces. Giving one slice of the pie to each child is equal. But what if one child is very hungry and one is well off? So, if you give two slices to the hungry child, one slice to the moderately hungry child, and no slices to your child who isn’t hungry, that’s not equal, but that is actually more fair.
I go on to identify numerous scenarios where unequal may be more fair: a caregiver child, a disabled child, a family business where only one child works in it, a vacation home only used extensively by one child, spending substantially more to educate a gifted child vs. a child who dislikes school, etc. I also explore cases where unequal may appear more fair on the surface, but watch out: one child who is well off vs. another who isn’t, one child with a rich mother (your ex-wife) vs. a child with your new wife who isn’t rich, or spending more on one child’s wedding than another’s. I quote Susan Garland’s New York Times article from 2021 that emphasizes how children see an inheritance as a proxy for love, interpreting a larger inheritance to a sibling as meaning that you loved that sibling more. As she wisely says, “Even an investment banker who doesn’t need the money has feelings.”
I identify the risks of going unequal, which Charlie Munger described as “poison” in his answer to a question I posed to him and Warren Buffett at a Berkshire-Hathaway annual meeting. Siblings can go to war, airing the family’s dirty laundry in the public forum of a courthouse. Bob Pressman of the Barney’s Department Store family was so offended that he turned in his mother and siblings for tax fraud, asserting that they falsely resided in Florida to evade New York state taxes, costing the family $50 million in taxes and penalties. (His revenge did entitle him to a 30% whistleblower award—that’s revenge, I’d say!)
People are always asking what to do. Here are some tips:
- Don’t surprise your kids. This is an opportunity for an open conversation in a safe, facilitated environment. Focus more on the family’s values than the valuables. Aim for buy-in, or at least diminish resentment. As Savlov says, “Equal is a mathematical solution. Fair is a conversation full of possibility.”
- Feel free to go unequal during life with no scorekeeping, but be ultra careful going unequal in a Will. A Will is a permanent document and a permanent reminder of the inequality.
- Consider taking out a life insurance policy that will go equally to all your grandchildren, per capita. As Bruce Udell of Sarasota teaches, that sends a powerful message that you love your grandchildren equally, even if some cousins may one day inherit more of your assets through their parents than others.
- Don’t overlook how to divide personal effects, as that’s often the source of major family feuds. Ideally, do like my mother-in-law Aimee Kriger and leave detailed instructions in writing.
- Life insurance is often a convenient solution, providing a source of funds to help equalize when some assets (like a family business) go all to certain kids and none to the others. Just buy the policy early, while you’re still insurable and the cost is lower.
As is usual, my TIGER colleagues had great input and questions. One asked, should the calculation to equalize be pre-tax or post-tax? I suggested post-tax, giving the example of a lifetime gift of high basis assets worth $1 million to one kid, and low basis assets worth $1 million to another. Upon sale, the kid who got the high basis asset will end up with more. Perhaps you should do something to even the score.
Another asked, should a rich sibling share his wealth with one who isn’t? It depends. There’s more to wealth than just money, and the family of the one with less may suffer a loss that’s more than just monetary. It can impact that family’s health, as well as their human, social, intellectual capital. On the other hand, if the poor sibling is an addict who has been bailed out repeatedly, you may be enabling the problem by throwing money at it.
Should a family who sells a business keep the proceeds intact or divide it, so each goes his own way? Some families (such as the family who sold Nestlé) prefer to keep it intact, fostering family connection through a family office that manages the investments and provides other services. However, consider providing a family member who wants out with an exit ramp. And if they exit, is the payoff calculated with or without a minority discount, and is it paid out over time with interest?
After G-1 dies and G-2 is managing the family business, should those who provide the ingenuity and labor receive more for their talents and efforts than the siblings who don’t work in the business? I suggested yes, with an independent board of non-family advisors being appointed to objectively measure the compensation.
If siblings have unequal net worths, how about involving all of them in a joint philanthropic entity, like a family foundation? Doing so can give all an important role and diminish the risk of envy. Not everyone can play a role in a family business, but every family member can likely play a role in family philanthropy.
What’s the number one recommendation to try to preserve family harmony? It’s family meetings, with a facilitator running the meeting rather than mom and dad. Research shows that the number one reason families fail is from lack of communication and trust. Family meetings can open up lines of communication, identify values held in common, and build bridges of mutual support.
Do you include a child’s spouse in the family meeting? The trend is yes. They will likely find out everything anyway through pillow talk, so better to manage the flow of information.
One final takeaway? Relationships matter more than money. When it comes to inheritance and family dynamics, don’t push issues under the rug. They will ultimately surface, and by then it may be too late to repair the damage.
Marvin E. Blum
Marvin Blum leading a podcast for fellow TIGER 21 members to debate the critical question: “Do I leave my estate equally to my kids when leaving it unequal may be more fair?”