The divisions that lead to the recent attack on the U.S. Capitol are having an effect on estate planning. It’s not surprising that family members have differing political views during this turbulent time. What is surprising: the growing number of clients who are considering disinheriting a child because of it. But disinheritance is extreme. A trust often can accomplish the clients’ goals without cutting the child out entirely.
Families are typically tolerant of varying political views. Parents put up with their children experimenting with different ideologies. And children tolerate their parents’ adherence to what they may see as rigid systems. The solution often is often to avoid the issue and carry on. The vast majority of parents leave their property equally to their kids, regardless of politics. But some are realizing what might happen if they leave a child with extreme views in their plan. The assets they have worked hard for may end up funding purposes they can’t stand.
Disinheriting a Child
In all states of the United States except Louisiana, a person can completely disinherit a child. The specifics in each state may differ. In Arizona, your will can simply direct that assets go to others. To avoid any misunderstanding, it’s a good idea to specifically state that the child has been intentionally omitted.
Many people don’t realize that in other parts of the world, disinheriting a child is almost impossible. Many countries have “forced heirship” laws, which provide mandatory rules for how an estate must be distributed.
Muslim countries follow sharia law, which provides a complex scheme of distribution that includes children. European civil law jurisdictions usually force distributions to children and spouses and sometimes more remote relatives. Mandated distributions apply whether or not a person makes a will. In some places, these laws even override gifts made during lifetime. For example, in France, if a person has one child, half of his or her estate goes to the child, and the percentage increases with more children. Louisiana employs a variation on the civil law concept.
But in the United States (except for Louisiana), we whole-heartedly believe in the freedom of disposition, or the right to give your property to whomever you wish at death. Almost every state has some protections for spouses, but not children.
Whether to Disinherit
Clients often ask if they are allowed to disinherit a child. The answer is of course yes, but we always ask why. Sometimes clients have been estranged from children for many years. Sometimes children are abusive toward parents. And sometimes parents believe they have provided enough already. In such cases, disinheritance makes sense.
Other times, parents and children maintain a relationship and parents love the child, but parents worry about how the inheritance might be used after death. More parents are now in this category. And they dynamics are as varied as families. Consider the politically moderate parent who sees her son among the rioters on CNN. Or the liberal parent whose child has rejected capitalism in all forms and states that he intends to give any inheritance to charity. The parents think their children have gone too far and don’t know what to do. Their first reaction is disinheritance. The second often is to leave the child’s share to a sibling and instruct the sibling to “do the right thing” and share if circumstances change. There’s a third, better option: a trust.
The Trust Alternative
Leaving an inheritance in trust has several benefits, and one of them is the ability to create a plan that specifically suits each situation. In cases such as these, the trust can specify what funds should be used for and when. Parents can add as many specifics as desired. The trust could even provide that if the child’s views moderate over time, he or she could receive the entire balance. Or that, if the child remains extreme, he never sees a dime. Someone other than the child should be trustee and make decisions regarding investments and distributions. Often clients choose other family members, but a family friend or professional (such as a bank or licensed private fiduciary) might be options.
The downside? If funds are retained in trust, earn income, and are not distributed to the child, earnings would be taxed at higher trust rates. Further, assets typically would not receive a tax basis adjustment at the child’s death. And, if a bank or private fiduciary serves as trustee, there would be fees. Carefully consider whether the extra control is worth the extra cost.
A trust arrangement allows the child to remain in the plan but with strings attached. Parents can control how funds are used plus provide flexibility for evolving circumstances long after they have passed.
Current challenges may seem insurmountable, but children can grow and change. Parents need not go to the extreme of disinheriting a child because a trust can be customized in ways that suit any situation.
In a closely related sidebar, The Atlantic says that a shift in American family values is at least in part responsible for growing levels of estrangement between parents and adult children.