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Friday, July 2, 2010

Is treating my children equally in my will the fair thing to do?

Most parents tell me that they want to treat their children equally in their Wills. This is not the law; you are allowed to give your adult children anything (or nothing) in your Will. If your child is handicapped or is a minor, that's a different story. Parents are pretty strict about making an equal distribution because they are well aware that doing anything else may give someone the impression of favouritism. Equal financial treatment apparently reflects equal love of the children.

For many of us, treating the children equally is as simple as stating in your Will that you want your estate divided among them in equal shares. After debts are paid and assets are sold, each child gets a cheque in the same amount.

Sometimes, though, it's not that easy. What happens when one of the children is going to inherit your business or farm? For many business owners and farm owners, that is the major asset. They don't have enough other assets to be able to give each other child the same dollar amount as the value of the business or farm.

I think business owners and farm owners should think twice before assuming that they should treat all of their children equally. To me, doing that ignores the fact that one of the children has been working in the business or farm and helping that asset achieve its current value, while the other children have not. Shouldn't that child be entitled to a larger share of the asset? Also, the child who inherits a business or farm is not being given anything for free; he or she is being given a means to make a living. The other children, who will receive cash or real estate don't have to do anything at all to get the full benefit of their inheritance, while the child inheriting the farm or business is going to have to work hard to get the value.

Having said all that, I am well aware that parents are still going to want to leave an apparently equal dollar amount to each child.

When calculating what you have in your estate to give to your other children, you should be aware that taxes arising in your estate are paid out of the residue of your estate. The residue is the part you are leaving to the child who isn't inheriting a business or farm. For example, if there is a capital gains tax liability arising on the transfer of the shares of the business from you to one of your children, the tax is not paid by the child receiving the business. It is paid from the money that the other children will inherit. Make sure you talk to an accountant or estate planning lawyer about tax implications when you are trying to equalize your estate among your children.

Even when there is no issue of a business or farm changing hands, it can be difficult to treat all children the same. Sometimes it's because there is a house or cottage that the parents particularly want one of the children to have. That house or cottage might be worth more than the child would receive if the real estate was sold and the money split.

Life insurance is one way of creating more wealth in your estate so that there is more available to give to your other children. It can be really useful to name your estate as your beneficiary so that insurance money pays into your estate on your death. Then it can be used either to pay taxes and expenses, or to top up shares to your children.

If you decide that you are going to leave an unequal amount to your children in your Will and you are afraid that this might cause hurt feelings or disputes, consider putting a brief clause in the Will to explain your reasons. For example, you might say that though you love your children equally, one is receiving a smaller share because you gave that child a lot of financial help during your lifetime and you want to treat everyone the same.

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