Most well-crafted estate plans incorporate copious amounts of paperwork: wills, trusts, powers of attorney, health care proxies and other key documents. Yet even the best plans can quickly come undone when another essential–children–are excluded from the wealth transfer process.
“Involving children in the planning allows for a smoother and more orderly transfer of the estate,” says Mark Teitelbaum, a chartered financial consultant and vice president-advanced markets at AXA Distributors, New York. “Their participation also helps in terms of maximizing the estate.”
Connie Golleher, a principal and chief operating officer at The Holleman Companies, Chevy Chase, Md., agrees. “It’s important to include children in the process because this leads to overall better estate planning,” she says. “The children are more likely to inherit their fair share of estate, either partially or totally. Including children in the planning can also significantly ease tensions after the parents’ deaths because they have a better understanding of the reasons for the parents’ decisions.”
All too often, however, children are shunted aside. The result, sources tell National Underwriter, can be disastrous, both in terms of the children’s financial well-being and intra-family relations. Such a downward spiral is especially common in cases involving “blended” families: those in which one or both spouses have children from previous marriages. In a typical scenario, a husband who remarries and has children by the second wife leaves nothing to the children of his first marriage at death. And that can lead to animosity among the surviving children.
Even in cases where the estate was distributed equitably among beneficiaries, frictions frequently arise, observers say, because the surviving children didn’t receive a share of the estate to which they believed themselves entitled. Case in point: An adult child heavily involved in a business owned by the parents is forced after the parents die to share ownership of the firm with siblings who have no business savvy or interest in running the company.
A failure to take such factors into account can lead to inter-family squabbling or severing of relations. The lack of planning can also be disastrous for the family business and the financial stability of children who depend on the company for their income. Experts call to mind the many instances of multimillion-dollar firms that went bust because surviving children couldn’t agree on how best to manage them.
“With all children, the expectation 9 times out of 10 is that when something happens to the business owner, that the children will receive equal value in the estate,” says Golleher. “But an equal distribution of business interest generally is not viewed as fair by kids who stand to inherit the business.”
“There is nothing as unequal as the equal treatment of unequals,” adds David Straus, a certified public accountant and taxation attorney based in Las Vegas, Nev. “You can give each child an equal percentage of the estate, but how and when clients leave the assets should be based on the kids’ respective needs and circumstances.”
That usually means giving the business-savvy child ownership of the family firm and other children equal shares of the estate in cash or other assets. This can be facilitated, notes Teitelbaum, by integrating life insurance into the business succession and estate plans. Death benefits can be distributed to non-owner children at the parent’s passing. Or, if all kids are given shares in the business, then life insurance can be used to enable one child to buy out the shares of siblings.
Communicating to children plans about the estate, Teitelbaum adds, also is especially important for parents who are seeking to optimize wealth transfer through delayed tax strategies. The parents might, for example, need to explain to adult children the tax benefits of making grandchildren (rather than the children) the beneficiaries of their individual retirement accounts, or of selecting a certain minimum distribution table for their IRA.
However the parents intend to dispose of their estate, experts say it’s best to involve the children as early as practical in the planning process–even kids who are still in their teens. Golleher notes that parents can use planning discussions to educate children about the estate and to enhance their “wealth inheritance skills,” enabling them to more easily assume responsibility of the family wealth at older ages.
Involving children early in the planning serves another essential purpose: acquainting them with the locations of key estate planning documents.
“Involving the children helps to minimize the types of inadvertent mistakes that often occur during turmoil connected with the death or incapacity of a parent,” says Donna Pagano, a certified financial planner and president of Family Love Letter, LLC, Westlake Village, Calif. “Every one of us has a paper trail. The longer you live, the more you acquire and the longer that paper trail grows. Families are often left with no roadmap to follow a deceased person’s paper trail.”