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You don’t have to have a lot of money, or a big family, to have a lot of conflict over an estate. Your estate consists of the assets that you leave behind when you die. But to the people left behind, settling an estate is about more than assets; it’s also about emotions and relationships. That can make the process of navigating estate administration or probate very complicated.
Nobody wants to have their children fighting over their estate, or to have the wealth they spent a lifetime accumulating frittered away. But as the saying goes, if you fail to plan, you plan to fail—and most of the inheritance pitfalls we’ll talk about below are a failure of planning, a failure of communication, or both. Fortunately, with the right help, you can avoid all of them.
Inheritance Pitfall #1: Blended Family Blues
By some estimates, over 40% of American marriages include at least one partner who has been married before. Not all of those previous marriages included children, but many do. If you are remarried with children from a previous marriage or relationship, whom do you want to inherit your assets when you are gone? Your spouse? Your kids?
For most people, the answer is “both.” They want to provide for their spouse, but they also want their children to receive an inheritance from them. Especially when the blended family gets along well, some spouses think that the logical solution is to leave everything to their spouse, with the surviving spouse promising to leave what’s left to the late spouse’s children from the previous marriage.
There are several potential problems with this plan. Once the assets are the surviving spouse, they are legally theirs to do with as they wish. They can travel around the world, blow it all on a wild weekend in Vegas, or donate it to their favorite charity. Or, as often happens, they could forget their promise and leave “their” new wealth to their own kids.
Even if the surviving spouse’s intentions are good, they could find themselves running through all the assets if they need nursing home care, leaving nothing behind for the late spouse’s children. Or they could die unexpectedly without an estate plan, meaning that their own children or heirs would inherit everything by law.
Even if everything goes according to promise and plan, the children of the first spouse to die might have to wait years, even decades, for their inheritance. In short: it’s a terrible idea to count on your spouse to ensure that your children receive what you intend to leave them.
A better option is to create a trust to protect the interests of both your spouse and your children. Having a professional trustee manage the trust, rather than a family member, may help all of your beneficiaries feel more confident that assets intended for them are being administered appropriately.
Inheritance Pitfall #2: Family Business Fiasco
If you are a business owner, it may have been your dream for your children to join you in the business and carry it into the next generation. The problem is, children tend to have dreams of their own. What do you do when one of your children joins you in the business, but the others don’t—especially if the business forms the bulk of your estate?
If you have the wealth to leave the business to the child who has worked in it and an equivalent amount of other assets to the other children, that is an option. But that is often not possible; too many assets are tied up in the business. Liquidating the business would allow you to leave an equal inheritance to each child, but that has obvious drawbacks, not least of which is depriving one child of their livelihood.
There’s no simple, one-size-fits-all solution. It really depends on the needs of your business and your family. However, you should avoid forcing a child who has been involved in the business into an unwanted partnership with a sibling who has not.
The best advice we have for this situation is to speak with an estate planning attorney with experience in business succession planning as soon as possible—ideally, years before you retire. It can take time to set a business up for success in a second generation, and you’ll want to communicate your plan to all your children so that they understand what you are doing, and why.
Inheritance Pitfall #3: Spendthrift Struggles
You love all your children (or grandchildren) equally. Still, you may be uneasy about leaving assets outright to one or more of them. Perhaps one of your children is a spendthrift—money just flows through their hands. Or maybe one of your kids is in a shaky marriage that you fear may end in divorce—with your child’s former spouse taking much of their inheritance in the settlement. Or perhaps you have a grandchild with a lot of debt, or a gambling or drug problem that you don’t want to fund.
You want to provide for your loved ones, but you don’t want to risk their inheritance evaporating. That’s exactly what could happen if you don’t make an estate plan. Your family members will inherit from your estate according to state law, with no restrictions on what they do with the assets. Once your family member has their inheritance, their creditors can reach it.
What is a loving parent or grandparent to do? The answer is probably to create a trust. Depending on the terms of the trust, you can protect your loved ones’ inheritance from their creditors. For instance, with a discretionary trust, the decision to make distributions is in the trustee’s discretion. Because beneficiaries have no right to demand a distribution, their creditors also cannot reach those assets. To avoid hurt feelings between family members, it may be best to have an independent professional trustee making decisions regarding distributions.
These are only a few of the possible pitfalls your family could face if you don’t take the time to plan. By working with an experienced estate planning attorney who cares about your unique situation and goals, you can protect not only your family’s financial health, but their emotional bonds. To learn more contact Estate Planning & Elder Law Services to schedule a consultation.
