As someone with a significant estate to leave, deciding who you leave it to and how you leave it are clearly important. Your personal preferences and the potential good your bequests can do are factors to think about in your estate planning. So is fairness — especially if you have several children or other loved ones to consider.
What Is Estate Equalization?
Basically, estate equalization is the process of helping ensure fairness in your estate plan, whether that means leaving all your primary heirs the same bequests or not.
The simplest form of estate equalization would be dividing all your assets equally by the number of children you have. Simple division, right? But this isn’t always the optimal solution. For example, business owners may face challenges when some children are involved in the business and others are not. Giving each child an equal piece of the company might not be best for the heirs or the business.
Or, what if one child has been living for a long time in the family home? Is it really best to split the house equally and force a sale that may result in that child having to move out?
Common goals of estate equalization can include:
- Avoiding inequality and treating all your heirs fairly
- Minimizing disputes after you pass
- Ensuring the continuing operation of a family business
Strategies for Estate Equalization
There can be several options for estate equalization that can help with different circumstances and estate planning goals.
Equal Distribution vs. Equal Value
Equal distribution of an estate is usually the simplest, mathematically speaking. You would divide all assets equally among beneficiaries, giving each person an equal percentage of each asset. For example, if you are leaving a house, a business and a stock portfolio to two children, each child would receive one-half of the house, one-half of the business, and one-half of the stock portfolio.
Equal value distribution focuses on giving each beneficiary assets that are worth, in total, the same amount. Each of the two children in the prior example might receive different types of assets. Perhaps one would get the business and a third of the stock portfolio while the other receives the house and two-thirds of the stock portfolio. Of course, to be an equal value distribution, the total monetary value of the assets received by each child would need to be as equal as possible.
Insurance Policies
Insurance can be an important tool in estate equalization, especially if you have assets — a family business, real estate, art, etc. — that you don’t want divided up or liquidated. The death benefit of an insurance policy can provide offsetting monetary value for beneficiaries who don’t share in the non-liquid assets. In our example case, the business could pay for a life insurance policy that would help equalize the inheritance of the child who didn’t receive a business share.
Gifting Strategies
Gifting is a way to help your heirs benefit from some of their inheritance while you are still alive. Also, if you believe your estate might owe estate tax, gifting assets to your heirs throughout your life can be an effective way to reduce those taxes.
When using gifting as an estate planning strategy, it can be important to pay attention to two IRS rules: the annual gift tax exclusion and the lifetime gift and estate tax exemption. As of 2024, you are able to give up to $18,000 annually ($36,000 for a married couple), to as many people as you want, tax-free.
The lifetime gift and estate tax exemption is the cumulative amount you can give away over your lifetime or after your death without incurring gift or estate tax. This number is $13.61 million per person in 2024.
You might maximize the two limits by gifting your children up to the annual exclusion amount of their inheritance annually and use the lifetime exemption for larger, one-time gifts. Once your estate tax exemption amount is reached, further gifts — made either during your lifetime or after death — are subject to a 40% tax rate.
Using Trusts for Equalization
Trusts can have multiple benefits in estate planning. Trusts usually avoid probate, saving time and court fees, plus giving your beneficiaries quicker access to the assets. Also, irrevocable trusts may not be considered part of your taxable estate, potentially lowering the estate tax bill.
Trusts can specify exactly how and when assets pass to your heirs. You can include an equalization clause in setting up your trust, which directs the trustee to ensure equalization. Keep in mind, however, that you will need to have enough assets in the trust to make this work. You can put life insurance policies under the ownership of a trust, helping to fund equalization and keeping them out of your estate, for tax purposes.
Navigating Family Dynamics and Communication
Estate planning issues can significantly affect the future of your loved ones. This makes communicating about your estate plan with your family important — but understandably difficult. Here are some tips to making the discussion easier and more productive:
- Ask questions. Before you put your estate plan together, you want to make sure you understand and consider your family’s circumstances, needs and goals thoroughly. This can help you make important decisions and help ensure fairness.
- Be transparent with answers. Be honest and prepared to give explanations for some decisions. That can help ensure your wishes are carried out once you pass. And have any important documents on hand, such as wills, trusts, lists of assets and accounts, etc.
- Be sensitive to emotions. You may want to consider time and place. Holidays may not be the right time for these discussions. Money conversations can be stressful, and talking about death can be even more difficult when families have come together to celebrate.
- Enlist the help of your advisors. Estate planning isn’t simple. You may need to ask your financial advisor or estate planner to help make complex estate equalization strategies clear and understandable to your family. After the discussion, they can also help you incorporate any needed changes.
Legal Considerations for Estate Equalization
Estate equalization, like all aspects of estate planning, has complex legal considerations. You should always have a qualified attorney help you navigate estate law, draft estate planning documents such as wills and powers of attorney, and properly set up trusts to effectively and legally achieve the goals you set for your estate plan.
Engaging Financial Advisors and Estate Planners
In addition to helping ensure your wishes are carried out, you want to minimize tax liabilities and maximize the impact of your bequests. Your financial advisor and/or estate planner can help you make appropriate investments, navigate the tax code, and keep your plan current with tax changes and market conditions.
To be custom-matched with a fiduciary you can trust to support your goals with customized planning and put your interests above theirs, take advantage of our advisor matching program today.
Alex Jensen is not registered with Cetera Advisor Networks LLC. Any information provided by this individual is provided entirely on behalf of CWM, LLC and is in no way related to Cetera Advisor Networks or its registered representatives.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
Charitable Remainder Trusts – Such trusts are used to develop a vehicle for donations to a favorite charity, which also allows for the reduction of income taxes through a charitable deduction and favorable tax treatment at the date of the gift by non-recognition of built-in capital gains. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.
