Navigating the 4 Most Common Challenges of Estate Planning

Perhaps the biggest challenge of estate planning is that there is not a one-size-fits-all template to follow. For estate planning to be effective, it is important to tailor a family’s plan. Every family is different, and estate planning can have a dramatic impact on future relationships with your loved ones. For example, parents want to design an estate plan that is fair for all their children. However, “fair” and “equal” are two different things.

Blended Families

For example, estate planning can be complicated in a blended family situation, where at least one spouse has children from a prior relationship. There is often conflict and competing interests between the spouse and the stepchildren. A person wants to provide for the new spouse and his or her own children and the stepchildren in a manner that is fair. Many times, the surviving spouse requires a large portion of the estate for lifetime income to cover daily needs, but stepchildren often want to place more limits on how much the surviving spouse inherits.

A common issue we help clients work through is whether all of the children are being treated equally. Several factors come into play in a blended family situation: how long the parents have been together, the ages of the children when they married, and the assets that each parent brought to the relationship. Most children, regardless of age, want the wealth from the originating or natural parent to stay in the original family. Often the surviving spouse with children from a prior relationship does want to separate assets to go to these children.

Typically, the older the parents and children were when the family blended, the more likely it is that the parents will keep their original individual assets separate and distributed to each of their original children. For the part of their estate that they established together, they typically divide that among all the children. In our experience, all parties deem this fair, and there is very little discord. However, the estate planning for this situation is complex and requires an enhanced level of expertise, which is why it is always a good idea to consult with a professional estate planner.

Surviving Spouse

Surviving spouses often inherit the entire estate and then proceed to make changes after the death. This can create a very emotional situation even in the closest families. Most common is conflict in a blended family situation, where a surviving spouse makes changes in favor of his or her children to the detriment of the deceased spouse’s children. With estate planning, both spouses can create a plan that includes irrevocable nomenclature to limit the surviving spouse’s ability to make changes of this nature.

Family Businesses

One of the typically stressful situations we see is estate planning that involves a family-owned small business. This scenario can be particularly emotional, especially when there are children who are and are not involved in the company. Often, fair and equal are very different in this situation. Parents find it difficult to determine what is fair for all children. Those that have diligently worked in the business often resent the notion of sharing ownership and profits with their siblings who haven’t contributed.

One solution we have found to be effective is the development of a differentiating compensation structure. We separate owner’s compensation (all children) from job-specific earnings of children who are employees in the family-owned business. This structure can adequately recognize the heir’s value as a team member in the company, while allowing profits to be divided with other shareholders, including siblings. Children who are active in the business still inherit ownership of the company, while the inheritance of other children can be equalized with other personal assets like cash, insurance proceeds, real estate or other investments.

Grandchildren

We also have many clients who want to ensure their grandchildren are planned into their estates. For example, clients have adjusted their estate plans based on each of their own children’s ability to provide the education needed for the grandchildren. The occupations and income of the children are factors, as are the number of grandchildren being provided for. All of this comes into consideration when deciding how the estate will be divided.

Estate Planning Is Key

We often tell our clients that if they really want to know a family member, share an inheritance with them. These situations can be very emotional, but there are ways to lessen hurt feelings. The first and most important step is to take the time to develop a well thought out plan. Estate planning is typically one of those things that people put off, often until the last minute. Once you have the plan worked out, communicate effectively with all family members regarding what your plan is.

Just remember, it’s never too early to start estate planning, and when you do, you can potentially avoid these stressful family situations. Give us a call to get started.

 

Opinions expressed in the article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.