A Q3 2022 Bloomberg article cited some fascinating, but unsurprising data regarding the struggle many wealthy families face in their estate planning. The 2022 study conducted by UBS Group AG surveyed 4500 clients at the Swiss Bank with at least $1 million in investible assets around the globe.
Two thirds of the investors claimed to struggle with dividing their assets fairly. The harsh reality for many future heirs was that assets were going to be distributed unevenly for a variety of reasons.
Reasons Cited for Uneven Distribution to Heirs
Source: UBS Investor Watch
Back in the early 2000’s, I was sitting in a meeting with another broker and his clients. He asked me to join him to help present the insurance portion of the estate plan. Unfortunately, not much planning, or understanding of the client’s situation, had taken place before I arrived. We sat there patiently listening to the broker talk about the impact of estate taxes and the need for insurance to pay the tax. At the time of the discussion, however, the laws had changed to where there wasn’t going to be an estate tax past 2010.
I could see the confusion on the couple’s faces. They were wondering why they had to do any planning since there was no future tax obligation. Why would they need to do any planning if there was no future need? Why would they have to purchase any insurance to cover an expense that wasn't going to be there?
This meeting was troubling to me on many fronts. First, the clients did not understand how much of an impact their decisions would have on their heirs. Glancing over their legal documents and how they wanted their estate distributed was setting up a potential family feud later in life.
Second, the couple’s decisions were based on tax implications only, without an understanding of how assets could be transferred. Reducing or eliminating taxes based on the rules and law is the right of every taxpayer. The responsibility of the advisor is to help guide them in making choices and define the reasons to make informed choices.
As I actively listened to the couple's concerns, I asked the simple question that has changed the way I approach every case since that moment.
”How would you like to treat your heirs? Equally or Fairly?”
This couple was worth about $22 million back then. They had two businesses and four children (three boys and a daughter). The husband immediately responded with the following;
When I looked up from taking notes, the wife had the most puzzled look on her face. It was clear that up until that moment, neither one of them had even discussed this topic. She immediately responded:
“Wow, really!?” I exclaimed. She then directed her question to me, “What do you think?”
I proposed we examine how each scenario would work, then they could appropriately determine what would be the best approach.
So, what is Fair? And what is Equal?
The more I asked this question of clients in the following years, the more I realized that these two words, “Equally or Fairly?” do not constitute the same thing. How they wanted to treat their heirs was subject to interpretation with differing viewpoints. That’s when I knew that every estate plan needs to consider and define what fair or equal means for their heirs. For some clients, the only way to be fair was to be equal. For other clients, fair was about what had been earned.
Having the “fair or equal” discussion at the onset of planning allows us to coordinate and collaborate with other advisors about how a plan can best be developed. After determining how you want to treat your heirs, you then look to see if you have enough liquidity to provide either the Equality or Fairness you seek. Verifying and reverifying to be sure the math checks out is paramount. Even the most thought-out and well-documented estate plans fail when there isn’t enough liquidity. Liquidity matters. You need liquidity to create Equality, Fairness, effective asset division, and working capital for assets to be kept in the family.
The question is straight forward “How do you want to treat your heirs, Equally or Fairly?” It is listening to the responses that makes the difference. There is no right or wrong answer to this question. We must simply listen to how the question is answered, and then plan accordingly.
What may first appear to be fair to us, can likely be viewed as biased by heirs after the fact. Emotionally driven perspectives as highlighted in the UBS study, can leave the people you care about in precarious positions. This is why estate planning should engage and involve the generations that stand to inherit in the planning process. If nothing comes as a surprise, estate distributions may be considered reasonable.
Estate tax law has changed a few times over the past 15 years. Don't be complacent, as things will more than likely continue to change going forward by 2026.
Matthew Hudack, CLU, ChFC
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