Estate Equalization: How Life Insurance Helps You Divide Assets, Not Your Family

Life insurance can be a valuable tool in helping you create an estate plan that’s fair and equitable for all of your loved ones. At its core, estate and wealth transfer planning is all about determining who will receive your assets and when they’ll receive them. Achieving an equitable distribution of assets is a goal that’s sometimes challenging, like if there’s a family business or a vacation home. The last thing you want to do is to split your assets in a way that ends up splitting your family.

Let’s look at a few scenarios of how life insurance helps you divide assets and not your family:

Scenario 1: Simple Family Business Planning

Meet Gwen, a single 60-year-old who is the sole owner of a small but successful local clothing business. Gwen has two daughters, Jen and Stacy. Jen works in the business with her mom, whereas Stacy chose another career path and is an accountant. Gwen knows Jen wants to run the business someday, but she doesn’t know how she can leave the business to Jen in a way that’s fair to Stacy. Most of Gwen’s assets are tied up in the business, so if she were to leave the business to Jen, that would leave very little inheritance for Stacy.

Proposed solution: Gwen discusses the situation with her financial professional, who recommends that she purchase a life insurance policy and make Stacy the sole beneficiary of this policy. Thanks to the leverage offered by life insurance and her good health, Gwen can buy a policy that offers a death benefit amount similar to the value [1] of her clothing business. Thanks to this policy, when Gwen dies, Stacy gets the policy and Jen gets the business, allowing both of her girls to receive assets of similar value.

The Power of Life Insurance The power of life insurance is in its versatility, as it offers a way to address the unique circumstances and estate equalization presented in each situation.

Scenario 2: More Complex Family Business Planning

Henry is an owner of a grocery store chain. He’s grateful that the business has been so successful that he’s been able to be the sole provider for his wife, Maggie, and their three children, Sam, Caroline, and Andy, for all their lives. Now that he’s getting older, Henry wants to make sure he and his business can still provide for his family even after he’s gone. These are the objectives he wants to accomplish:

• Ensure Maggie has enough to support her standard of living for the remainder of her life without Henry. She hasn’t been and doesn’t wish to be involved in the business.
  

• Preserve the business as his legacy and pass it down to Sam, who works alongside him in the business. He hopes Sam can enjoy the same success he has and can continue the business tradition.
  

• Leave an equal inheritance to Caroline and Andy to allow them to continue pursuing their dreams outside of the business.

Proposed solution: Henry has been working for years with a team of advisors, which includes his financial professional and attorney. The next time he sits down with his financial professional to review his current plan, he brings up all of these concerns to see what they might be able to put into place that will care for all the important people in his life. His financial professional suggests two ideas that in combination can help address all his needs:

• First, to solve for the business needs, his financial professional suggests that Henry and Sam enter into a one-way buy-sell agreement that Sam will fund with a life insurance policy on his dad. Sam will be the owner, will pay premiums on the policy, and will be the sole beneficiary. When Henry dies, Sam will receive the death benefit, which he’ll then use to purchase full ownership of the business from his father’s estate. The buy- sell agreement ensures that Sam can succeed his father in the business, while the life insurance policy ensures that he’ll have the necessary funds to purchase the business when the time comes. Caring for the business in this manner also cares for Caroline and Andy, as when Sam buys the business from Henry’s estate, this provides the estate with an influx of cash. The cash from the sale can then be used by Henry’s estate to provide an equal inheritance to Caroline and Andy.
  

• The one last person on Henry’s list to care for is Maggie. To make sure Maggie can maintain her standard of living when he’s gone and Sam owns the business, Henry’s financial professional recommends that Henry purchase his own life insurance policy and make Maggie the beneficiary. When Henry dies, the death benefit can offset any taxes owed at the time and provide additional income for Maggie to live on for the rest of her days.

Scenario 3: For More Than Just Businesses

Kristen and Eric have three boys, William, Jonah, and Tyler. Some of their most treasured memories made as a family have been at the vacation home the couple own on Cape Cod in Massachusetts. Now that the boys are grown and have families of their own, Kristen and Eric get to host their grandchildren for special summer vacations. This house is so much more to all of them than just a property, and Kristen and Eric are worried about how they can pass it down to the next generation in a way that’s fair and that will allow the boys to keep the property in the family.

Proposed solution: During Kristen and Eric’s annual review with their financial professional, the topic of the future of the house on Cape Cod comes up. Their financial professional recommends that the couple sit down with the three boys to discuss not just the house, but their broader estate plan, including who will serve as their Health Care Proxy or Durable Power of Attorney, if needed. Part of successful planning includes communicating wishes and intentions to the next generation. Kirsten and Eric schedule an appointment to follow up with their financial professional after they’ve talked to their kids.

When Kristen and Eric return to their financial professional’s office a few weeks later, they’re ready to make decisions about the future of their assets, including the vacation home. When they discussed the topic with their boys, the couple discovered that the decision was easier than anticipated. While each son may have wanted the house, it became clear that the best owner for the next generation was Tyler. William’s wife Rachel recently inherited a house in Vermont, and they were worried about their ability to upkeep what could then be two additional properties. Living out on the West Coast, Jonah can’t get back to Cape Cod as much as he’d like anymore, and he’d be caring for the house from the other side of the country. They all agreed Tyler and his family should inherit the house with the hope that each brother and their family can still enjoy it. Now that ownership of the Cape Cod house is settled and knowing it’s important to Kristen and Eric that each son receive an inheritance of similar value, their financial professional suggests that the couple purchase a survivorship life insurance policy on their two lives and make William and Jonah the beneficiaries of the policy. The financial professional creates a customized life insurance proposal for Kristen and Eric that helps them achieve their goal of leaving an equal legacy to each son.

Estate Equalization with Life Insurance

For decades, TRC Financial has been helping families navigate the complexities of estate and wealth transfer planning with life insurance, ensuring that a legacy of assets doesn't become a catalyst for family division. The core challenge in estate and wealth transfer planning is achieving an equitable distribution of assets, especially when a significant asset, such as a family business or a treasured vacation home, cannot be easily split. As demonstrated in the scenarios, a properly designed life insurance policy can be a versatile, valuable tool to address unique family circumstances. Whether it's using a policy to provide an equal inheritance to a non-business-involved sibling, funding a buy-sell agreement to transfer a business and create cash for other heirs, or using a survivorship policy to equalize an inheritance when one heir receives a primary property, TRC Financial is equipped to help clients achieve their goal of passing wealth to the next generation as fairly and equally as possible. Schedule a time to talk with us.

[1] Consult your tax or legal advisor as to the valuation of a business.

This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that neither TRC Financial, nor M Financial are engaged in rendering tax, legal, or actuarial services. If tax, legal, or actuarial advice is required, you should consult your accountant, attorney, or actuary. Neither TRC Financial, nor M Financial should replace those advisors.