Our children are not the same.   No matter how we slice it, there is no equality when it comes to the kids, especially about money.

There’s a tendency by most people to automatically give equal amount to their children.    This is one of the worst things that you can do especially if you are a business owner.

Baby's Hand

Take a look at your IRA accounts.  Do you have your children listed on there with equal amounts?  Does your will or trust have everything split up evenly?

In some cases, this makes sense but some of the time, it does not.  There are many situations where you have to play favorites because the needs differ.

AGE DIFFERENCE

It is a common mistake to give equal shares to children when they are at different ages.   The youngest children should have more of the inheritance because they have a bigger financial need than older kids.   Giving unequal share does not mean that you’re being unfair to the children.

Remember that your older kids have had the benefit of being supported financially by you while they were growing up.    The extra money that you’re leaving to the younger ones just ensure that they get the same financial support until they come of age.

If you factor it out over their lifetime under your care (18 years or 22 years), it will be equal.

Recent case:

A 55 years old executive,  Sarah, bought a $1 Million insurance policy to take care of her 6 years old daughter and her 25 years old daughter.   She had three other adult children with excellent careers.

When we sat down to review her accounts, I found that her adviser had assigned 20% equal shares to all her children.  This means that if she passed away, her 5 yrs old daughter would only get $200,000 to cover her living expenses for 16 years as well as the college education.

Her 25 years old daughter is terminally ill and was unable to buy life insurance for the three grandchildren.    Part of the insurance purchased was meant to provide a safety net for the grandchildren who were all under 5 years old.   These three children would have to be supported by $66M each until they become adults.   This assumes that their mother does not use up all the funds for her medical needs.

Sarah’s other three adults children does not really need any financial support and the inheritance of $200,000 for each would just simply be a nice bonus that they spend.

These are some of the questions that Sarah needs to consider about to how to share her legacy appropriately.

1.    Who needs the money the most because of circumstances beyond their control?   A 6 yrs old child has no option to take care of his/herself unlike an adult.

2.    How much money would be needed to cover the needs that Sarah wanted to pay for?

3.     What kind of needs does Sarah want to pay for?  Does she want college education for her grandchildren?

4.     What are the tax consequences if she left the money directly to her grandchildren versus their mother?

5.     What are the conversations to have with all the adult children to prevent envy and jealousy?

6.    What will be the cost of a guardianship for her 5 year-old?

7.    What is the current financial support for her sick daughter?

8.    How much does she want to cover for her grandchildren?

9.    Does she want to provide college education for her daughter or grandchildren?  If so, the $1 Million isn’t enough.

These are just some surface questions.   The next level for Sarah would involve planning that covers all of her assets to maximize the benefits for every single heir.

Have you looked at your IRAs or insurance policy lately?   Did you fall into the trap of automatically splitting up equal shares?

© 2010 MoneyandRisk.com all rights reserved

photo credit: Tony Kwintera

Certain facts have been altered and names were changed to protect the privacy of the individual.