When leaving an unequal inheritance makes sense

For many people, one of the key steps in estate planning is making sure their children are treated fairly when it comes to inheritance. But "fair" doesn't always mean "equal," especially if your family situation or assets are complicated. In some circumstances, giving kids equal inheritances may not be the best option.

Equal inheritances have actually become less common, in fact. According to data from the University of Michigan's Health and Retirement Study, the proportion of parents over 50 who reported treating children unequally in their wills rose from 16% to almost 35% between 1995 and 2010.

Leaving unequal inheritances can be a risky move, though. According to a 2018 Merrill Edge Report, 1 in 3 Americans say their financial stability depends on receiving an inheritance. The stakes can be high for siblings — and their parents.

When to leave an unequal inheritance

Although it can be simpler to split your assets evenly among your beneficiaries, you might feel strongly about helping an adult child who is struggling, or maybe you want to leave less to a child you've already financially supported. Perhaps you want to set up a trust for a child with functional needs or give more to an adult child who has children of their own.

One of the most common reasons people leave unequal inheritances is to address uncompensated caregiving from an adult child. In a 2018 study by Merrill Lynch and Age Wave, two-thirds of the respondents said that children who have provided care to them in their later years should receive a larger inheritance than those who did not.

Attorney Susan H. Levin, who specializes in elder law and estate planning at Rosenberg, Freedman & Lee in Newton, Massachusetts, says that when a child has had to compromise their lifestyle to take care of a parent — such as giving up a job or working part time instead of full time — the parent understands the sacrifice and often wants to favor that child with the inheritance.

According to the Merrill Lynch and Age Wave study, many parents also feel that children who need the money most should get more. That may mean leaving less to kids who are relatively well-off.

For example, Levin says she recently worked with a client who has five adult children, four of whom own homes. The fifth child, a daughter, has struggled financially due to health issues. The client plans to leave her home to the daughter and leave a second property to a son who manages her properties and performs all her repairs for free. Because the client has few assets outside of these two properties, these bequests "leave very little for her other three children," Levin says, resulting in "a very unequal distribution."

How to prevent conflict

Although unequal inheritances are often intended to reward children for their help or to ensure children are left in the best financial condition possible, Levin says, disputes can occur if one sibling feels that another sibling didn't "earn" the extra inheritance. Those squabbles can quickly escalate from hurt feelings to legal battles, but four things may help minimize the strife.

1. Explain your wishes

If possible, have an honest conversation with your heirs to explain what you've decided to leave them and why — before it's too late. Consider including an estate planning attorney to ensure that everyone understands the tax implications and liabilities associated with the assets. A professional mediator can help siblings work through emotional reactions.

If you don't feel comfortable speaking directly to your family, another option is a handwritten letter.

"I tell [clients] to write it in their own words and explain why they're doing what they're doing," Levin says. This move can also help defend your will if it is contested in court, which can happen if an heir feels that another beneficiary had "undue influence" over you in order to receive a bigger inheritance.

2. Add a deterrent

Despite your explanation, your heirs may still disagree with your choices and decide to contest the will in probate court. One way to discourage heirs from contesting your will is to insert a no-contest clause stipulating, for instance, that anyone who contests the will and loses forfeits the right to any inheritance, Levin says. However, these clauses aren't interpreted the same way in every state, so consult an estate planning attorney in your state to make sure your will's wording will stand in court.

3. Consider setting up a trust in addition to your will

If you're more concerned with the use of your assets — for example, if you're thinking of giving a smaller inheritance to a child who's irresponsible with money — consider a trust, Levin says. A spendthrift trust, for example, lets a trustee decide when and how much of the inheritance a beneficiary receives over time. You could also set up an educational trust to preserve funds for school expenses. In addition, trusts can help in blended families by providing for a spouse but not children from a previous marriage, for example, and in some cases, they may have the added benefit of minimizing estate taxes.

Trusts are typically harder to contest because, unlike wills, they usually bypass probate, which is the court-supervised legal process to distribute a deceased person's assets.

4. Invest in meaningful relationships

Financial need can certainly motivate someone to contest a parent's will in court, but emotional baggage can also have an impact. Long-held sibling resentments can bubble to the surface at the end of a parent's life, and a larger inheritance may look like a preference for a "favored" child. In Levin's experience, the more secure children feel in their relationships with their parents, the more likely they are to accept the decision to leave an unequal inheritance.

"You don't want to do this in a way that's going to create conflict within the family. You really want your kids to get along and continue whatever your family's traditions are. We don't want to set this up in a way that's going to harm them," Levin says.

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Dalia Ramirez writes for NerdWallet. Email: [email protected].

The article When Leaving an Unequal Inheritance Makes Sense originally appeared on NerdWallet.