Split Your Kids Inheritance Fairly

A Simple Solution

Photo by Irina Murza on Unsplash

Parents are faced with the question “How much should each child get when we die?” Simple answers include: “each child gets nothing”, “one child gets everything”, or “every child gets the same amount”. Poor choices can result in dysfunctional families, lifetime sibling animosities, and even murders when the distribution of inherited assets is deemed unfair by one or more inheritors. There is no perfect solution — you can’t please all the people all the time.

This article describes a simple method for partitioning funds among children that assumes:

• parents want to be fair
• the children will understand (but maybe not agree with) the parents’ definition of fairness

What is Fair?

Fairness is in the eye of the beholder. Every family is different. Being fair can consider many factors. Here are a few:

• the financial net worth of each child
• the ability of each child to enhance his/her financial future
• the number of children/grandchildren of each child
• the existence of split marriages and blended families
• life expectancies

To keep things simple, the example used in this article assumes the financial net worth of each child is the determining factor of fairness. Net worth is a measure of how “well off” a person it and is often used by bankers and accountants. In simple terms, a person’s financial net worth is the difference between his/her assets and his/her liabilities. However, the method here works with any numeric measure of “well offness”.

Being fair assumes those with a lower net worth should receive a larger inheritance than those with a higher net worth. The question is “How much larger?”

The Method

The simple 7-step procedure below is followed by an example with 4 inheritors.

1. Determine each child’s net worth (or use a surrogate of net worth)
2. Calculate the total of the children’s net worth
3. Calculate the fraction of the total net worth for each child
4. Calculate (1- the fraction in step 3) for each child
5. Calculate the sum of the values in step 4
6. Calculate each child‘s fraction of the inheritance
   = (value in step 4)/ (value in step 5)
7. Calculate inheritance for each child (step 6 * total inheritance)

Example. Assume parents plan to allocate a total of a million dollars to their 4 children. Suppose the children have a net worth values of: Ann $100K, Bob $200K, Cindy $300K, and Dave $400K. Their total net worth is therefore $1,000K. The calculations for step 3 through 7 are shown in the table below.

Comments. The inheritance values decrease by the same amount for each dollar increase in net worth. In the example the inheritance decreases $167K for each $100K increase in net worth.

If one or more children have a negative net worth (liabilities exceed assets), simply add the size of the most negative value to every child’s net worth before doing the calculations. This means the adjusted net worth for the child with the smallest original net worth will be zero. That child will receive the largest inheritance.

Summary

This method partitions the total inheritance among inheritors. It has many elements of fairness. It simply requires assigning a net worth (or equivalent) to each child. The biggest challenge is of course to decide what is fair.