When equality doesn’t lead to fairness?

By Naomi Neville, Tax, Trusts and Estates senior associate at Irwin Mitchell

A recent survey of 2,000 people by wealth management company Netwealth found that only 53 per cent of parents plan to divide their wealth evenly between their children. This is despite the fact that parents generally want to achieve fairness for their children. What are the circumstances in which an uneven split of wealth is the most fair thing to do? Why do so many people choose not to benefit their children equally? Does this lead to increased risk of dispute after death, and how can this be avoided?

Clients who have had a falling out with one child often want to leave less of their estate to that child, or perhaps want to write them out of their will completely. But it isn’t only family arguments or diminished relationships that might result in one child receiving a smaller share of their parents’ estate. Even when everyone gets on in the immediate family, parents can be concerned about the influence of the partner of a child over spending, or perhaps concern over the stability of a particular relationship and these concerns can be enough to reduce the share of one child.

It's becoming more and more common for parents to provide significant financial help to their children while they are living. This help is likely to be provided at key times of need for each child, such as on the occasion of buying their first home or helping with school fees for grandchildren. Children of the family are unlikely to reach these life stages at exactly the same time, and a parent may be keen to ensure equality of distributions of the estate, taking into account whatever gifts have been made at the date they die. They might want to consider the extra impact an ‘early’ inheritance can have by allowing for the effect of inflation when equalising the estate on death.

Families with vulnerable children may want to consider making gifts in a different way to protect their assets and to protect their vulnerable child. Vulnerability comes in many forms, and each family will have their own concerns which need to be carefully considered. Some vulnerable children have their own sources of funds or are unlikely to need larger capital sums to meet their lifestyle. Others might have a vulnerability that could be increased with unfettered access to a large inheritance, and so controlled access is key. Parents of vulnerable children commonly use trusts to add a protective layer, whether or not they decide to leave an equal share of the estate for that child’s benefit.

Parents might want to take into account the financial security of their children in deciding how to split their estate. The children of a family will not all end up in equivalent financial situations, some may have more financially rewarding careers, others might marry into additional wealth. Financial security can also be affected by the number of grandchildren each child produces, and a parent may want to recognise this.

A parent with a more complex estate will need to take into account non-financial factors when deciding what's fair. For example if the parent owns a valuable property which is lived in by one child, is it fair to leave that property to the occupying child outright even if this leads to a disproportionately large share of the value in the estate passing to that child?

In families where there are businesses owned and run by the parents, it is common that not all of the children will take a role in that business, in which case a greater share of the business might be left to the child who is actively participating in it. Farming families often have to consider difficult questions of this nature. Where there's great value in farmed land or business assets there are also likely to be inheritance tax consequences to take into account when considering how to divide an estate.

Other than in the case of the estranged child, a parent doesn't often see the unequal division of their financial wealth as being representative of lack of fairness. However, where an unequal division is unexpected and only discovered on death of a parent, this can lead to an increased risk of dispute, perhaps as a result of a feeling of unfairness.

It's possible to minimise risk of post-death dispute by taking appropriate legal advice, having open discussions with your family, and perhaps also leaving letters of wishes setting out your thinking. Ultimately, what is fair is a personal decision, and what is right for one person won’t be right for another. It is really important that you make a Will with a suitably qualified expert to ensure that your wishes are followed in the event of your death.