Using Life Insurance to Equalize Inheritances

Using Life Insurance to Equalize Inheritances

Preserve Harmony in Your Family:

Using Life Insurance to Equalize Inheritances

Deciding what to leave to your heirs is a basic consideration when developing your estate plan. What if dividing certain assets equally among your heirs will be difficult due to the nature of the asset? Life insurance can provide a n ideal solution.

The Concern

Certain assets, such as a residence or a business, can present administrative and practical challenges for multiple owners. If you own a family business, multiple-ownership might lead to conflict, especially if some of your heirs are more active in running the business than others.

Leaving a single asset entirely to specific heirs is almost certain to create inequality unless your estate has sufficient liquidity.

In circumstances like those, liquidating the asset and distributing the proceeds can seem like the only option if good relations are to be maintained.

The Solution

Liquidity in your estate is an important factor in achieving a distribution of your assets among your heirs in the proportions that you might like. The death benefit offers a pool of liquidity at exactly the time it is needed. It can facilitate your estate planning goals, helping to give each of your heirs the inheritance you want them to receive.

How it Works

You (or a trust for your heirs) purchase an insurance policy on your life. Death benefit proceeds are used to help provide your heirs with inheritances when assets are distributed. This balances out the value of “hard-to-divide” assets left to some of your heirs but not to others.

Case Study

Richard and Susan Barclay, age 58 and 57, both good health, have a $4.5M estate. Their jewelry business has done well, thanks to the help of John Barclay, one of their three children

They plan to leave the business to John and divide the rest of their estate between their other two children, Karen and Andrew.

Their advisors project the business and securities will continue to grow at 4% a year, with their real estate increasing in value at 3% annually. At those rates, they anticipate that their estate will be valued at about $6.5M ten years from now.

The distribution that Richard and Susan anticipate would leave Andrew with a business worth over $4.4M. Karen and Andrew would inherit about $1M each. Without additional planning to
compensate for the unequal inheritances, a family controversy is almost certain to erupt.

Richard and Susan purchase a survivorship universal life policy with a $6.8M death benefit and annual premiums of $49K. By the time their estate needs to be distributed, this policy ensures that each of the three children can receive inheritances of equal value.

By providing a pool of liquid assets at exactly the time it will be needed, the death benefit from the life insurance policy may offer an important advantage in maintaining good
relations among the Barclay’s heirs while promoting estate planning goals at the same time.

Note that an investment of the cumulative amount of premiums paid would have had to earn 6.7% after tax (assuming 35% income tax rate) or 10.31% of pre-tax to equal the death benefit. Actual results may be more or less favorable.

Summary of Benefits of Using Life Insurance for Inheritance Equalization

  • Liquidity – Life insurance helps provide cash to equalize inheritances among heirs, as well as protecting a family’s income in the event of premature death.
  • Return on Premiums – Heirs may receive more money and better return on the premiums than if those dollars had been invested in a taxable asset.
  • Income-Tax-Free Death Benefit – Death benefit proceeds are generally income tax free.
  • Cash Value – The cash values of a life insurance policy grow tax deferred, and tax-free withdrawals are permitted when structured properly.
  • Source of Premium – It is possible to tap income and/or stock from a family business as a source of premiums.