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Loss Aversion: Wills, Trusts, and Avoiding Conflict

Men feel the good less intensely than the bad” – Livy, The Annals

Loss aversion is the idea that losing something is worse than getting something. We feel the loss more than we feel the benefit. Loss aversion often impacts how we live our everyday lives. We avoid the things that may hurt, even when there is a potential reward. Loss aversion is not limited to one’s owns decisions. The principle holds even when we don’t control the decision leading to the loss or gain.

People often react in a negative way when they learn of their disinheritance by will after the passing of a parent. Loss aversion helps explain this reaction. Adult children have a simple expectation when it comes to inheritance: I get to participate in it. I get something. In my experience, this thought can become so ingrained that some people with no knowledge of their parents’ estate plan have already made plans for “their” portion of the estate. It’s already theirs. Now, some document says they get nothing, or they get less than they planned on receiving.

Creating unequal inheritances for children is relatively common. It’s probably more common than most people think. There can be all kinds of reasons for this. Maybe the child did something reprehensible in the parent’s eyes. Maybe one child is doing significantly better than the others and has less of a need. Did a child forget their mom’s birthday one year? Whatever the reason, learning of the disinheritance can be devastating for the child, especially when they didn’t see it coming – loss aversion. Imagine not getting what your siblings receive, even if you don’t need the property or particularly want it.

Fortunately, there are some tools to help keep loss aversion at bay and prevent family squabbles and potential litigation over an estate. A few are listed below.

1.    Use a No-Contest clause.

These clauses will disinherit a potential heir if they begin to challenge a trust or will. Maybe a child wants to say that the grantor did not know what they were doing when the will or trust was made. They are free to contest the will; but, it may cost them their inheritance.

2.    Use a Revocable Trust

Revocable Trusts can be used to avoid Probate. Probate avoidance is essential because it is incredibly easy to challenge a will in Probate Court. A disgruntled child only has to show up at the hearing in which the will is admitted and say that they want to contest the validity of the will or the selection of the person acting as the executor or personal representative of the estate. Once challenged, the Probate is moved to the contested docket for its next hearing, slowing down the entire process. Notice of the hearing to admit a will to Probate must be given to each potential heir – meaning every child will have notice of the hearing.

3.    Discuss the Estate with Family Members

Maybe the best way to avoid conflict is to discuss the estate plan with all the potential heirs. An explanation can go a long way to assuaging a potentially disgruntled child; it may even stop them from thinking that a portion of the estate is rightfully theirs and avoiding loss aversion.

It is even possible to resolve some potential conflict by discussing the will or trust early. For example, a plan may leave a specific collectible to one child. Another child may expect to inherit the collectible. By reviewing the trust or will, the parent may learn of this expectation and rework the plan to accommodate the child's wish.

Every situation is different. It isn’t wise to use every tool available in every case. Nonetheless having a plan to avoid family conflict should be a part of every person’s estate plan.