Hannah: Hello. My name is Hannah Boundy and I’m a partner here at Sherwood Financial. Today I’m joined by my colleague Matthew Davis to talk a little bit about what it looks like to leave behind a fair inheritance. Matthew, can you tell us a little bit about why this topic is important and how we see it come up for our clients?
Matthew: Thanks Hannah. Oftentimes we see this topic show up during our Legacy Planning process. We’ve worked with many well-intentioned families who are wanting to set up a meaningful financial legacy for their loved ones and how they go about this is a big deal. It goes beyond just the financial well-beings of their heirs. There’s a relational aspect to it. It has the potential to be empowering, but it can also be executed poorly, particularly when it comes to splitting up assets among multiple heirs. So what we want to share today is a few tips for navigating that division in a way that meets the clients goals.
Hannah: Absolutely, and one of the areas we often find clients stumbling over is this idea of fairness and how do you decide who gets what. Can you speak a little bit more to that element of legacy planning?
Matthew: Like any other area of financial planning, we always want to start with the specifics of a client’s circumstances. Each client faces a unique set of variables and has specific goals. When it comes to building a legacy, there’s often a temptation to use your financial legacy to nudge heirs in a certain direction. What we’ve found however, is that the smoothest and simplest approach is to make equal gifts to heirs. It typically causes the least amount of conflict amongst heirs – particularly when one of the heirs is listed as the trustee. And part of the reason for this is that every well-intentioned plan tends to have some shortcoming where one person’s feelings will get hurt.
One common example we see where this arises is when we see one heir struggling more than others and it’s tempting to leave them more to give them equal footing, but often we see that other heirs may feel they’re being punished for doing well and being responsible and this ends up creating relational tension. Alternatively, we’ve also seen clients trying to use their legacy to reward good behavior, but this can also have unintended consequences – encouraging some family members to embrace jobs or lifestyles that they may not be well-suited for, not to mention the potential for creating a lot of tension amongst heirs particularly if one heir ends up with the bulk of the assets.
Ultimately, this remains a personal decision, but we’ve found in working with many families that the smoothest approach is typically to give everyone equal shares instead of trying to base their proportions on some other metric.
Hannah: Those are really great points and I can definitely see how some of those relational tensions can arise. Could you offer a few examples of exceptions to this advice – maybe a few instances where it might make sense to have an unequal inheritance.
Matthew: Absolutely. Like I said, this is ultimately a personal choice and there are some instances where it may really make sense to have a targeted inheritance and the one that really stands out is an instance where you have an heir with special needs. And we typically see this making sense for the rest of the family members, particularly siblings who understand that if that individual isn’t provided for, they may have to step in as well to take care of that person. Another similar situation may be an instance of substance abuse where not everyone is in a healthy place to receive an equal gift and you may need to set up a special structure for that person. It’s not that the gift has to be unequal, but it might be that the gift needs to come with certain restrictions for the sake of the well-being of the recipient.
Hannah: That makes a lot of sense. And like you said, every situation is different and that’s really the beauty of Legacy Planning, is that takes into account the unique elements of each situation to build a plan that works for that family. On that note, could you share a little bit about what it looks like to execute on some of these strategies.
Matthew: Of course. I think the first thing for clients to do, is understand where they are now. When it comes to defining legacy divisions, our proprietary Legacy Planning process is really well-positioned to help us review your current estate documents and visually illustrate the logistics of how they’re drafted. This process then helps us identify any issues related to the division of assets and offer tangible financial planning and estate planning solutions. A key part of this process is creating a wholistic summary of your estate and then building a map for how you want your estate to be distributed. At that point, we can start to look at different estate planning tools such as specific trust language or even creating additional trusts for specific heir’s needs. Our team then works with your estate attorney to help ensure that your estate documents are correctly drafted to execute on your intended goals.
Hannah: Thanks Matthew. I think that’s a really helpful explanation of the process and something that we’ve seen firsthand can have a huge impact on the security a family feels knowing their legacy is secure.
If you have any questions regarding the specifics of dividing your inheritance, or would like to learn more about our Legacy Planning process, please click the link below to schedule an introductory call with one of our advisors.