Life Insurance as the Great Equalizer

Life insurance is a common estate planning tool to ensure there’s enough liquidity to cover estate taxes and other settlement costs as a way to maximize the estate for the heirs. When owned by an irrevocable trust, the proceeds are not only tax-free but are also excluded from the estate. This allows heirs to avoid having to sell assets to pay for estate settlement costs. For large estates exceeding $11.7 million (the 2021 estate tax exemption), life insurance is a highly efficient way to preserve the estate.

But what about estates of any size, holding substantial hard assets, such as a business or real estate, that must be split equally among heirs with disparate interests? Life insurance can become the great equalizer, ensuring each of the heirs gets equal treatment.

For Continuing the Family Business

For example, Bob and Martha own a jewelry store with one of their children participating as a key employee. Randy has been helping his parents build the store into a successful enterprise and would be a natural successor to run the business. The business is worth about $2 million. Bob and Martha’s two other children, Steve and Lori, have no interest in participating in the business, but they want to treat them equally when it comes to an inheritance. Currently, they have about $1.5 million in other assets that could be split between Steve and Lori. Based on current values, that would provide them each with a $750,000 inheritance, far short of the $2 million value of the jewelry business being left to Randy.

The easiest solution would be for Bob and Martha’s business to buy a $2.5 million insurance policy that would effectively buy out Steve and Lori’s interest in the business. That would bring their share up to $2 million each, equaling that of Randy’s.

For Preserving the Vacation Home

Another prevalent example is when real estate is involved. Richard and Cathy own a beach house in addition to their personal residence, worth about $600,000. Their home is worth about $300,000. One of their children, Wendy, loves the beach house as a place to bring her family several times a year. Their son, Terry, lives on the other side of the country and has no use for the beach house. Richard and Cathy would like to see the beach house remain in the family, so they could leave it to Wendy and give Terry their personal residence to own, rent, or sell.

To make up the difference between the value of their residence and the beach house, Richard and Cathy could purchase a $300,000 life insurance policy naming Randy as the beneficiary.

For any families with estates comprised substantially of hard assets, having a conversation with an estate planner about how to equalize the estate among children would be worthwhile. Especially if it can keep the harmony and show their children they are equally loved.