When a parent owns a business that forms the bulk of the estate, sometimes one child is active in the business and others uninvolved. In this situation it is difficult to treat all children equally in the estate plan without providing a child with an unwanted business ownership interest. Fortunately, there is a simple and low-cost solution to this dilemma -life insurance.

For example: Dan, a father of two grown children, runs his own chain of bicycle stores. While his son John is heavily involved in the business, and would be very prepared (and willing) to assume the role of owner upon his father’s death, Dan’s daughter Laura is not interested in the business, as she is a successful physician and would not want to leave her practice. Even though Laura is financially secure, Dan would like to leave her a substantial portion of his estate—equal to what John would receive. Since Dan’s estate is worth about $4,500,000 and the business alone is worth $4,000,000, to leave Laura the remaining portion of the estate after the business would be unfair.

By purchasing a life insurance policy for Laura on his own life, Dan would be able to ensure that his children inherited nearly equal shares of his estate. Since this policy would be used to provide estate equalization, it is extremely important that the policy remain in force, which is why a permanent life insurance policy makes sense.

Dan can gift the premiums to Laura each year, and upon his death, the proceeds will give her a cash equivalent of one-half of the bicycle business, instead of a share in the business. With the non-business related proceeds from the estate, this will balance the estate shares between the children nearly equally. Laura receives a cash value, and John will own the bicycle business outright.

While the amounts do not come out exactly equal, it is equitable - both children have been fairly treated - since, although John is receiving slightly more assets, he is also assuming the full risk of the bicycle business, a business which may end up being worth less with the loss of its founder. However, taking advantage of excellent planning and using life insurance to create liquid assets, the estate can be equally distributed among Dan’s children. We can help you determine if your estate can be equalized through the purchase of a life insurance policy.

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