The Family Scorecard

My first brush with this concept came during a meeting in my office with the four children—three sons and one daughter—after their last parent died. Their Living Trust left all of the assets equally to each child. At some point during that meeting, their daughter produced a computer printout of the significant gifts their parents had made to them: $10,000 for one child’s wedding; $7,500 for one child’s care; $25,000 attorney fees for one child’s divorce; and so on. My mouth went agape at the detailed recollection of these expenses.

After this recitation of expenditures, the daughter announced that after tallying all the gifts, she had received the least amount by about $125,000.

The daughter turned to me and asked if I had advised her parents to factor these lifetime gifts in determining whether their inheritance was truly equal for each child. I admitted I had not given that advice because I did not see the connection. Gifts are gifts. Inheritances are inheritances.

But the daughter said something to me that profoundly changed my thinking in that respect: “Mr. Condon, I don’t think your firm did a good job on my parents’ Living Trust. My parents were very fair people, but the disparity of the gifts to their children is significant. Had this disparity been brought to their attention, I am certain they would have taken steps in their Living Trust to equalize those gifts. But it wasn’t brought to their attention, was it? So the opportunity they had to equalize fell by the wayside.”

This woman spoke the truth. As an inheritance planning attorney, one of my chief functions is to create a Living Trust that does not cause harm to a client’s family. This function cannot be achieved unless attention is cast on matters outside the Living Trust that matter to the children. If unequal lifetime gifts are important to the children—and they absolutely are—those matters become relevant to the Living Trust.

We live . . . we learn. Now, whenever I meet with a new client, I always bring up the subject of lifetime gifts. But unfortunately for the daughter, this on-the-job training came too late. Dad and Mom were dead, and the only solution to equalize the unequal lifetime gifts was an agreement by all the children to apportion the inheritance in a manner other than equal. I meekly suggested this course of action to the three sons, but their only response was to silently notice the decor in my office.

The daughter made one last shot in an attempt to get her siblings to give her a portion of their shares to equalize the lifetime gifts. She stood up and addressed her brothers: “Guys, if Mr. Condon had done his job correctly, Dad and Mom would have equalized. You know this. I know this. We are a family. So as a family, we should do what our parents would have done if Mr. Condon had brought it to their attention in the first place. Just give me a portion of your shares to make me whole.”

Silence.

“If you won’t do this for me, do it for Mom and Dad.”

More silence. I could almost hear the crickets chirping. Personally, I was moved by that little speech and I would have tossed some part of my share her way. But her brothers just did not say anything, and the room grew icy cold. One of the brothers finally said, “Let’s discuss this later.” With all that had transpired in my office, it was obvious to everyone that there was no substance to that statement. It was just something to say to break the silence and placate the daughter.

What I know of the family today is that they did not equalize, and the daughter, once close with her brothers, has no meaningful contact with them.

You Live, You Learn

In retrospect, I should have asked Dad and Mom whether they made any earlier lifetime gifts to their children, determined the extent of the disparity of those gifts, and discussed solutions that could be incorporated in their Living Trust to equalize among their children, which could have included the following:

• In the Living Trust, Dad and Mom provide that an extra amount goes to the children who received less in lifetime gifts, and that all their children receive the rest of the Living Trust assets in equal shares.

• During their lives, Dad and Mom arrange for the children who received less in lifetime gifts to own a life insurance policy on the joint lives of Dad and Mom in an amount equal to the disparity. Then, in the Living Trust, Dad and Mom provide that all Living Trust assets go to their children in equal shares.

• During Dad’s and Mom’s lifetimes, they give cash to the children who received less in lifetime gifts in an amount needed to bring rough equalization of all lifetime gifts among the children. Then, in the Living Trust, all assets are left to the four children in equal shares.

Now that I have raised your awareness of this problem, you should tell your attorney about it and incorporate the appropriate solution in your Living Trust . . . but only if you care. You may be the type of person who, like many of my clients, thinks their children are lucky to get anything during their lives or after their deaths. As one client said to me, “Mr. Condon, what planet did you come from? My kids should be bowing to me in gratitude on a daily basis for all the things I’ve paid for them. And now you think I should care that they will get mad after I die because I gave more to some and less to others? If they become that ungrateful, they can go screw themselves.”

If this client speaks for you, then fine. There is no law that says you need to care about creating equity among your children. However, based on the vast number of times I have raised this issue with clients during my 20-year practice, this “I don’t care” viewpoint is in the vast minority. Indeed, whenever I point out the insurmountable chasm of conflict that unequal lifetime gifts create among children in the inheritance arena, the typical reaction is, “I never really thought about that before. Let’s explore this further.”

However, even when we go exploring, it sometimes appears that no solution exists to equalize lifetime gifts. This is typified by a parent who makes a gift to a child that the child uses to purchase an asset that appreciates substantially by the time of the parent’s death. The parent’s other child wants equalization. But what amount will satisfy the other child? Not an amount equal to the value of the original gift, but an amount equal to the value of the appreciated asset! Unreasonable, but true!

Examples of this scenario abound. In one situation, my clients had two children, a son and a daughter. They told me that about 20 years before, they had given their son $50,000 to purchase a home for him and his wife. When I gave them the routine about how unequal lifetime gifts can adversely impact their children’s sibling relationship, the husband literally said, like clockwork, “Gee, I never really thought about that before.” Eventually, they agreed to leave their daughter $50,000 “off the top” with both their children splitting all their other Living Trust assets equally.

So far, so good.

Ten years later, both clients died and their son and daughter came to my office for advice on the administration of their parents’ Living Trust. All was well until I said, “I just want to make sure you know that the daughter gets an extra $50,000 from the Living Trust. I advised them to put that provision in to make sure that she has the same amount that your parents gave to the son 20 years ago.”

I remember how puffed up I was when I made that statement. I was very impressed with myself that I, like some superhero, had come to the aid of this family by resolving an otherwise elusive issue that could have insidiously destroyed that family had it not been recognized . . . by me!

But that balloon of pomposity was burst by the daughter, when she said to me: “Mr. Condon, what the hell were you thinking? My getting an extra $50,000 doesn’t come close to making it fair. My brother took that $50,000 and used it to buy a $250,000 home. That’s one-fifth of the purchase price. Twenty years later, his home is worth $750,000. That gift of $50,000 is now worth $150,000. If you had really thought it through with my parents correctly, you would have advised them that I should get an extra $150,000.”

Once again, I stood corrected. Or rather, I sat there red-faced and corrected. Giving the daughter $50,000 20 years later was not equalization. If the daughter had also received $50,000 20 years before, she too might have had appreciated equity of $150,000.

The daughter attempted to prevail upon her brother the wisdom of giving up $100,000 of his inheritance to her to increase her specific bequest to $150,000. You can imagine what her brother said to her as he gesticulated to his sister with his middle finger. That was the end of a formerly close sibling relationship.

There is usually no difficulty in equalizing relatively small gifts that are used to fulfill a temporary need—wedding, medical emergency, automobile repair, attorney bills, and the like. However, equalizing gifts that are used to purchase appreciating assets is a completely different animal. As my father used to say, not every problem has a solution.

An Easier Pill to Swallow

Of course, you can resolve a disparity in lifetime gifts by leaving an extra amount of Living Trust assets to your “less-gifted” child. But, if you are not rich enough and the disparity is significant, it will be hard to stomach that attempt at equalization. In fact, I cannot recall any client who has been willing to leave a substantial sum to a “less-gifted” child to equalize the significant disparity that results when lifetime gifts are used to purchase assets that become highly appreciated.

In my mind, the only viable solution to this problem is the use of life insurance. That is, you arrange for your “less-gifted” child to own, and be the beneficiary of, an insurance policy on your life in the amount of the disparity. When you die, that child receives the death benefit, which will not be reduced by any tax. For many of my clients in circumstances similar to the son and daughter I have discussed in this example, equalization through life insurance has been an easier pill to swallow than simply an outright bequest of extra funds from the Living Trust to the “less-gifted” child. But for this son and daughter, no such solution was offered because the lawyer who advised their parents (me) did not recognize the problem.

Separate but Unequal

Do you feel depressed? Have you had enough of the tales of spoiled children who you may feel have no right to squawk over unequal lifetime gifts? Have you had your fill of how your Living Trust can unintentionally create a chasm of conflict between your children? Too bad. I need to make you aware of one more common scenario in the inheritance arena that can effectively kill the relationship between your children.

And once again, it involves an inheritance that you thought was equal, but ultimately turns out not to be.

One of my clients had two sons and two apartment buildings of approximately the same value. I advised my client to leave the buildings to her sons in equal shares. But my client informed me that her sons never really got along and it would be a good thing for them not to co-own each property. That sounded good to me. Each would receive a roughly equal inheritance, and each would not require the involvement of the other in the management of their respective buildings.

I drafted a Living Trust that left Building One to one son and Building Two to the other. At the time of my client’s death, both properties were of approximate equal value, and both sons were relatively happy with the allocation made by their mother’s Living Trust.

The peace did not last long. Within a few years after their mother’s death, Building One had escalated in value while the value of Building Two remained flat. Prior to this development, the brothers had a relationship that was, at best, lukewarm for the sake of their respective children. After the disparity occurred, it was all-out war between them. Even though the brother with Building One had no influence on the inheritance plan, the poorer brother with Building Two transferred his anger to his richer brother. Today, the children of both brothers do not really know each other, even though they live within blocks of each other.

The road to hell is paved with good intentions. What started off as my client’s good intent resulted in intense jealousy. The ensuing battle was the last thing my client wanted for her children.

Take a lesson from this cautionary tale. Do not leave separate properties to separate children in your Living Trust. The economic circumstances that arise following your death could drive their values up or down, leaving your children with unequal inheritances, which will add nothing but conflict to their lives. Instead, leave your properties to your children in equal shares so they will share the upswings and downswings of each property equally.