I know a family that has a beautiful home with about 30 acres surrounding the lake. The family has enjoyed making memories at the lake house. First, just with Mom, Dad and the five kids, but the family has now grown to 17 kids and grandkids total. Mom and Dad are getting up in their years and can no longer open and close down the lake home as seasons change. There are already murmurs among the kids about who should help with these seasonal chores and who is really spending the most time at the lake house.
In a conversation with my friend, who is married to one of the children involved in the lake house, I asked, “What are they planning to do with the lake house when they pass?” She told me they were planning to give it to the 17 children and grandkids! I was shocked. I said to my friend, “What a mess that will make.” I understand that they love their family equally and want them to continue to make memories at the lake house long after they are gone, but this is going to cause family conflict. It may actually cause the children not to get together at the holidays because they are fighting over responsibility for the lake house!
The same can happen with a family owned business.
You may have a business owner who has three children but only one works in the business and is interested in carrying on after the father passes, yet the father wants to make sure each shares equally in his assets. If he really wants the business to continue and to have those children not involved in the business to continue in their chosen professions, it is imperative that he take the time now to equalize their inheritance in a way that is equitable for all of the children.
This dilemma can be easily solved!
The solution may be to create inheritance equalization using life insurance. Here is how. Upon the death of the father, the child involved in the business inherits all stock becoming 100 percent owner in the business. The children that are not involved receive an amount equal to the value of the stock in life insurance proceeds and any other non-business assets.
What does that look like? An example:
Elaine and Tony own a business worth $2 million and have additional assets worth $1 million. One of their children, Bob, works in the business. Their other two children, Jan and Steve, do not. Elaine and Tony want to share their estate equally with their three children when they pass. The problem is that a portion of that asset transfer will be in company stock. This could be a disaster because Bob would likely be resentful having to pass profits from his sweat equity to his siblings. Jan and Steve might wonder if they are really getting their fair share.
To solve the problem, Elaine and Tony purchase a $3 million survivor life insurance policy that pays out at the second death of Elaine or Tony. The receipt of the proceeds plus the additional assets of $1 million would give Jan and Steve $2 million each while Bob inherits the business worth $2 million. The children are all treated equally and equitably. Plus, they remain friends and enjoy each other’s company on the holidays!
