Disinheriting Children Can Be Dicey

Parents today can face an unenviable choice: leaving money to kids who aren’t good with money or don't share their family's values or disinherit them all together.

They say that money is the root of all evil, but that’s not quite right since money can also be the product of much hard work, knowledge, and ability. What tends to be right more often than not, and also what happens to be more unfortunate, is that money is the “toxic soil” of crooked trees, unruly gardens, and those that don’t understand money and value itself.

That’s a serious challenge to a parent trying to create an estate plan and especially when it's the family business they hope to leave in good hands.

As pointed out recently, here, a possible, albeit difficult, option among parents whose kid doesn’t share their values can be disinheritance. That’s right, you may actually decide to simply not leave your wealth (or some form/amount of wealth) to your child. It need not be out of malice, but it likely will require every bit of planning that otherwise leaving a inheritance otherwise would.

While your challenges aren’t with in the political system, the tax court, or even arcane IRS challenges,  they are nonetheless real. For one thing, you must decide what to do with those assets if you don't plan to pass them within your bloodline. At the same time, you must protect your decision against entreaties and potential lawsuits from the disinherited.

The poster-parent of this idea, and the source of much legal activity in the Australian Court system, is none other than Gina Reinhart, the mining billionaire (and an heiress herself). It seems Ms. Reinhart came to the conclusion that her children aren’t fit to run the company and shut them out of the ownership stakes of the business (although they are already part of the family trust):

Court documents cited in the Australian media show that Ms. Rinehart believed the kids weren’t fit to manage their fortune. She said none had ever held a real job, unless it was given to them by the family. “None of the plaintiffs (her children) has the requisite capacity or skill, nor the knowledge, experience, judgment or responsible work ethic to administer a trust in the nature of the trust in particular as part of the growing HPPL Group,” she claimed in court papers.

It’s not a complete disinheritance, but it is a decided opinion, and a terse objection, to leaving certain things to those children. Indeed, a tough call.

More information about the Reinharts and their trials can be found in the original article.

Their specific situation and grievances aside, it goes to show that planning to give and planning to withhold are, usually, two sides of the same coin. They require the same decision making and authoritative execution.

You can learn more about  estate tax planning in the Estate Tax Planning Practice Center on our website. Be sure to sign up for our free e-newsletter to stay abreast of issues like these that could affect you, your loved ones and your estate planning.

Reference: Forbes (March 13, 2012) “Billionaire Says Her Kids Aren’t Fit for Inheritance

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