Family Money is a sensitive topic to cover, but I think it’s critically important from both an estate planning standpoint and from the standpoint of personal relationships with family members. Primarily, when it comes to things like wills, gifting, and financial assistance to family members (usually children) there are a complex array of considerations that many parents either don’t take into account – or ignore. Primarily, the topic comes down to Fairness vs. Favoritism. Let me delve into a couple hypothetical, yet real life examples.
Estate Planning – The Will
The Doctor – A couple in their 60s is looking to update their will now that their children are grown and starting to have children of their own. They have two children. Their First son is a relatively affluent doctor whose wife has a decent income as well. Not only do they pull in a six-figure income, but they have also made wise money moves throughout their marriage. The doctor and his wife have built a sizable net worth through real estate investments and relatively frugal living given their income. They’re viewed as “well-off”.
The Drifter – Enter the second son. He didn’t go to college and never had much in the way of professional ambition. He has drifted around from various music gigs and bartender jobs to seasonal employment while collecting unemployment in the off-season. He pretty much spends what he makes, or more each year. He has no assets in any retirement accounts and often portrays himself as “the victim” to family and friends. He is generally viewed as “poor” and some in the family feel sorry for him, especially when comparing his prospects to his brother’s family.
The Will – The parents have a sizable estate when considering their life savings and real estate. Assuming medical bills later in life don’t eat into their nest egg, they’ll be leaving somewhere in the range of $1.5 Million to their heirs. When considering their sons’ financial situations, they figure that the doctor is in no need of financial assistance and will be just fine no matter what happens. When considering the drifter, they have constant guilt over whether they could have done more to get him on the right track – whether they could have been more involved in his schooling, taken a more active role in his music career, or just loved him enough to give him the self-esteem to be more successful in life.
They decide that the right thing to do is to leave a token $100,000 to the doctor in their will and the remainder – well over $1 Million to the drifter. They feel confident in their decision that they’re doing the right thing by both their sons. They don’t discuss their financial affairs as they’re still in good health and money matters of this nature were never discussed as a routine topic in the family. They don’t consider what this eventuality may do to the relationship between the brothers; they’re pretty much thinking about what they think is “fair”.
Question – Is this fairness? Or is it favoritism?
Another fairly affluent couple has two daughters. Each of the daughters had a similar upbringing and pursued similar career paths – they’re both school teachers. Given the current tax laws in their state and the size of their estate, the affluent couple has been gifting to their daughters for several years now. They don’t discuss the gifts openly and usually send a check and card in the mail for each New Year and the unwritten rule is to not publicize or discuss the situation with the others. The sisters don’t talk much now anyway and it would be awkward to do so, so the topic never comes up between the two of them.
Daughter #1 – She married into a relatively healthy financial relationship; her husband’s an attorney and together, they pull in decent money. Their children are into school now, so they’re both working. They live a reasonable lifestyle and have made sound financial decisions, including investing the majority of the gifting money they receive each year. They’ve each been getting $2,500 check every year now for 10 years.
Daughter #2 – She started off as a teacher, but now she’s home with her 4 children, 2 of which are in school. She’s had some tough luck with relationships and is recently divorced – for the second time. Neither of the husbands had adequate income to provide meaningful child support (and alimony is out of the question). She’s now primarily living off meager child support payments when they do come, unemployment and gifting from her parents. The parents are keenly aware of her difficulties and they’ve been gifting her and each of her children $12,000 per year, and in prior years, the maximum amount allowed under tax law. She uses the gifts to the children to help pay for living expenses. In addition, the grandparents pretty much pay for all the clothing and entertainment for the kids and give a lot of cash gifts at holidays outside the purview of the IRS.
Over the years, Daughter #2 and her children have been gifted in excess of $200,000. Daughter #1 and her husband have been gifted approximately $50,000.
Question – Is this fairness? Or is it favoritism?
Tragic Health Expenses
Finally, consider the couple that has two children. The older son is in normal health and in his thirties and they have never gifted him, paid for college or provided any sort of financial assistance outside the expected child-rearing expenses. The younger son is in his twenties now. He has been afflicted with various autoimmune disorders since childhood and has needed virtual constant hospitalizations and treatment. He can’t really take care of himself and between his medical treatments and help with constant caretaking, the parents have pretty much exhausted their retirement savings and expend the majority of their current cashflow on maintaining a dignified life for him since what is provided by government assistance isn’t adequate. The older brother is well aware of the situation, and has lived his entire life watching his brother suffer. He wouldn’t trade his health for anything – including his parents’ money.
I’m not going to ask the question. It’s no longer a question of “Fairness” when it’s life and death and the recipient had no role in their predicament.
As you can see, it’s not always simple. It’s easy to judge the motives and actions of others depending on your vantage point. However, in the first two situations, there will clearly be some animosity when the other sibling finds out just how lopsided their parents’ treatment was. Parents reading this have to ask themselves “Is that the legacy I want to leave? Children jealous and fighting?”.
I’m not writing this post because I have a personal gripe about fairness or favoritism, as my family’s routine affairs and estate planning (including ours to our children) have always been set up with a keen focus on fairness – an even split no matter what. However, I see it routinely with friends and acquaintances and it’s evident that while many families are confronted with difficult circumstances, decisions are often not applied consistently or in a transparent manner.
What Are Your Thoughts and Similar Examples You’ve Experienced or Heard Of?
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