Building a “Fair” Estate

Fair does not necessarily mean equal.  Fair means equitable.  Fair means each got the right amount.  It means that people who should have a particular asset, receive such an asset.  Daughter #2 is the only one of the children who took lessons long enough to play piano well.  The piano she learned on should belong to her.  The family business has been part of the life of another child.  He has contributed to its value.  The other children have been uninvolved.  That child should get the business.

The business case poses many problems.  These are the more common:

  1. The business is likely the most valuable asset in the estate and sometimes nearly the only valuable asset.  I know a case where the family business is worth more than $20,000,000 while the remainder of the assets are worth less than $500,000.  Five children, one in the business. Problem!  There are many where the business is more than 60% of the estate and the costs and taxes will come out of the other 40%.  Problem!
  2. The shares in the business are worth something on the date of death, but a portion of that, conceivably a big portion, is because of the presence of the child manager.  Should his contribution to value be ignored?  In fairness yes, but under tax and estate law, probably not.
  3. Some children need more than others.  Should the family poet get the same inheritance as the family pediatrician?  What about a disabled child?  What if a child is likely to spend their share quickly?

A person can assess how their estate will go, but they need to look from three different viewing points.

  • Their executor’s view
  • Their heirs’ view
  • Their own view

The executor tends to see liabilities and liquid assets before anything else.  If they are going to pay taxes, final expenses, various professional fees and bequests to charities and the like, there must be cash.  Missing the cash, what assets can be sold promptly.  The executor year problem.  The description of outcomes for most executors is sell the best; keep the rest.

Heirs value fairness and speed.  An estate that fails to distribute for a long time is a poorly designed estate.  Heirs compare their result to their siblings.  More salient, their spouses compare.  The very capable compare to what could have been had planning been better.

The heirs and the executors tend to have a position that is “Baked in.”  There is little they can do to change things.

As opposed to heirs and executors,  the person’s own view has the advantage of being changeable.  If the after looking at the other two positions, they can see problems, they can change the mix.  More liquidity, better tax plan, earlier transfer of assets, trusts, freezes, better cash flow generating techniques while living, and more.  The most efficient way to cure the estate liquidity problem is with suitable life insurance.

Most people see their estate plan just from their own viewing point.  That denies the ability to anticipate problems.  A problem anticipated is a problem that can be solved.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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