Equality vs. Equity: Considerations For Leaving Estate Assets To Your Children.

Any good parent strives to love and care for all their children (and grandchildren) equally, while trying their best to avoid favoritism.

When strategizing your estate plan it seems intuitive to do the same, to take the straightforward route and give an equal share to each child. After all, you may be thinking you don't want to play favorites, right? And in many family situations, equal division of inheritance is the best approach.

But there is a difference between "equal" and "equitable." There are instances where, in the name of equity, it might be worth considering giving unequal shares.

Here are a few situations where giving unequal shares may be the most equitable thing to do:

• Having a child with special medical needs who would rely on the extra financial support.
• Providing more funds for children who are planning to go to college, vs. those who aren't.
• Rewarding a family member who was more attentive during your lifetime, perhaps a loyal caretaker who deserves extra as a gesture of appreciation.
• Limiting the share for a child with gambling or substance abuse issues or a history of poor money-management.
• Disinheriting a child who is estranged from you.
• Giving a smaller share to an adult child who has been more successful on their own and doesn't need (or want) a large inheritance, and thereby giving more to others who do need it.
• Reducing the share for a family member who owes you money, such as through a loan or business venture.
  

Give it some thought: Perhaps it's equitable to give more money to a loved one who needs and deserves it more and would appreciate it. Perhaps it's equitable to give less to someone who has not been as much a part of your life, or who has money issues.

The key point to remember when dividing your estate is that it's your money and you get to do with it as you see fit. Just keep in mind that taking the equitable-but-unequal approach to your estate plan carries some risks. There may be children who won't be happy to discover that they received less than (or none of) what they feel was their rightful share of your estate. They may be jealous that someone else received more. An equity over equality plan can give rise to family drama, and possibly a legal challenge (contest) of your Will. 

You are in the best position to know your family's values and their dynamics. Deciding whether to divide your estate equally among your children, or to tip the scales in favor of some children over others, is not an easy task. Talking candidly with your children about your estate plan now may help smooth out the road ahead. But how you choose to give is your decision to make, and there are no wrong answers.

Collecting Debts Owed To An Estate.

Last week I discussed debts owed by a decedent (and accordingly, debts owed by the decedent's estate). One of the first items of business in administering an estate is paying valid debts.

But what becomes of debts by others, owed to the estate? How are those debts collected? Who is responsible for collecting them?

In the case of receivable debts to the estate, which is the subject of this post, the decedent was the original creditor, and upon the decedent's death, the debtor is not necessarily relieved of their debt.

An estate is a legal entity, just like a business is a legal entity. And just as accounts receivable by a business are considered assets, so too are debts owed to an estate.

In probating an estate, the personal representative is responsible for gathering and taking inventory of all the estate assets, as well as maximizing and protecting those assets. Therefore, the personal representative has a duty to collect any debts owed to the estate. Since the personal representative also has a duty to pay debts owed by the estate, collecting on receivable debts is important, as it maximizes the value of the estate. Valid debts are paid by the estate assets, and any remaining assets are to be distributed to the beneficiaries according to the terms of the Will, or according to the laws of intestate succession, if there is no Will.

Collecting the debts.

The first question: Is there an existing contract for the debt? If so, the estate can usually enforce the contract, just as the decedent could have enforced it while alive. In this sense, the personal representative "steps into the shoes" of the decedent. If the debtor to the estate refuses or fails to pay the debt, the debtor can be subject to legal consequences. The personal representative can sue the debtor to collect.

In instances where the creditor is unable to pay the entire debt, and the family wants to avoid a prolonged battle, it may be wise for the personal representative to negotiate a settlement, to at least salvage some of the debt. The personal representative should make efforts to glean as much as reasonably possible from debtors.

If there is no contract, it gets murkier. The personal representative can try to collect, but it may be a case of "he said-she said," and one of those parties is gone. It doesn't hurt for the personal representative to at least try to collect such debts, but the PR may come out empty-handed.

(Pro tip: If you, the testator, are going to loan money to someone with the expectation of repayment, memorialize the loan in writing, even if the debtor is a family member.)

In some cases, such as with an insolvent estate (debts owed by the estate exceed its assets), it may be impractical for the personal representative to pursue all receivable debts, as collecting may not change the estate's insolvency status. The beneficiaries may not wish to pursue such a futile battle, preferring instead to wrap up the probate process and moving on with their lives. 

The important point regarding the personal representative is that the PR has a duty to make reasonable efforts to maximize the value of the estate.

(Another pro tip: When having your Will crafted by an attorney, make sure that the attorney includes an "indemnification" clause that protects the personal representative. This will help prevent the personal representative from suffering personal liability while acting in good-faith in carrying out their duties to your estate.)

One of the important tasks of settling an estate is gathering all of its assets. Will your nominated personal representative have the tenacity to collect debts owed to your estate? This is another thing to consider when choosing someone to act as your personal representative.

Debts Owed By An Estate: Who Gets Paid First?

One of the first items of business in administering a decedent's estate is the paying of valid debts. In the probate process, the appointed personal representative must locate creditors of the estate and give notice to them. The creditors have a certain amount of time in which to make a claim against the estate.

Minnesota law sets forth a priority for how debts are paid by the estate, called Classification of Claims. While some creditors may be more assertive than others, the squeaky wheel does not get the oil. This is the pecking order for the payment of estate debts:

1. Expenses related to administering the estate, including attorney fees.
2. Reasonable funeral expenses.
3. Any debt having preference under federal law, including federal taxes.
4. Medical expenses related to the decedent's final illness.
5. Medical expenses incurred during the year prior to the decedent's death.
6. Any debts under state law, including Minnesota taxes.
7. Any unsecured debt, such as credit cards, utility bills, etc.

If the total value of debts exceeds the estate assets, the estate is deemed insolvent. In such a case, some of the debts farther down the list may not be paid at all. And unfortunately for the heirs of the estate, they will not receive a share of estate assets.