The Basics of Estate Equalization
Estate Equalization is a crucial concept for affluent business owners to utilize in order to pass on their estate, as well as their business, to the next generation in an equal and fair manner to their children. All too often when Estate Equalization is not utilized, family members can come into nasty conflict over their parents’ assets. What Estate Equalization in essence does, is that a plan is created that outlines who receives what. If the parents have multiple children, perhaps only one of the children intends on taking over the family business. If no plan is created, then the child that takes over the family business is greatly enriched while the other children are left with little to nothing. Situations like these are very common, and can cause great strain in the relationships of siblings. With Estate Equalization, not only can you prevent these inequalities, but you can also grow your assets, protect them by using tax-free life insurance distributions that helps pay any estate taxes that become due, all while creating another supplemental income stream during retirement.
Estate Equalization: Solving Inheritance Issues
Stephen (74) and Ellen (72) have three children: Jack, Landon, and Sophie. Stephen owns a business worth approximately $15 million, which has grown at an average rate of 3% annually. Jack works in the family business, while Landon and Sophie work in other industries. Stephen and Ellen plan for Jack to inherit the business upon their passing, but they want Landon and Sophie to inherit a similar amount as well.
A simplified look of their scenario would look something like this:
As we can see by the illustration, the business is projected to grow to approximately $22-24 million by the time Stephen and Ellen hit their approximate life expectancies. If current legislation stays in place, then the children will be looking at having to pay Federal Estate Tax of around $4 million. If no plan is in place, it is likely that they would have to liquidate part of the assets in the business to fund this Federal Estate Tax. However, if Stephen and Ellen put a plan into place, then this issue can be avoided.
Implementing an Estate Equalization Strategy
The above illustration shows the flow of assets from the parents to the children. As previously stated, Jack is set to take over the business once his parents pass. If we assume that Stephen and Ellen pass near their expected life expectancy, then Jack would be good for around $20 - 25 million. However, a $4 - 4.5 million Estate Tax would be due. It may be difficult for Jack to come up with this money without having to sell off significant assets of the business, assets that may even be needed for the business to function.
Implementing an Estate Equalization Strategy
Stephen and Ellen can address the estate tax issue and equalize the assets between their children by implementing a well-designed life insurance strategy.
Life Insurance to Cover Estate Tax: Stephen and Ellen can purchase a permanent life insurance policy with a $5 million death benefit. Jack can use the proceeds from this policy to pay the Estate Tax, preserving the business's assets and preventing the need for liquidation.
Life Insurance to Equalize Inheritance: To ensure that Landon and Sophie receive an equal share of the family's wealth, Stephen and Ellen can purchase additional permanent life insurance policies with a total death benefit of $20 million each, naming Landon and Sophie as beneficiaries. This way, each child inherits approximately $20 million.
Below is the updated flow chart with life insurance proceeds attached:
Maximizing the Estate with Life Insurance
With proper planning, Stephen and Ellen can grow their assets and pass on three times the original amount to their children, totaling around $60 million. This effective strategy preserves the family's wealth and helps maintain harmony among the siblings.
Funding Life Insurance Premiums with Loans
In many cases, clients don't use their own money to pay for life insurance premiums. Instead, they take out loans from banks at low interest rates (2-3%). With growth through crediting in the life insurance policies often exceeding 7-8%, clients can achieve a net positive return. At the end of a period, excess crediting can be used to repay the loan and any accrued interest. This strategy can also generate additional income for the parents during retirement, should they require it.
Conclusion: Secure Your Family's Future with Estate Equalization
Estate Equalization is an invaluable tool for affluent business owners looking to pass on their wealth in a fair and tax-efficient manner. With decades of experience implementing such plans, SKA Financial Group can guide you through the process and help secure your family's financial future. If you're interested in learning more about Estate Equalization and whether it's right for you, don't hesitate to contact us today!
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