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'Equalizing' Your Estate Ensures Wealth You Leave is Well Kept

'Equalizing' Your Estate Ensures Wealth You Leave is Well Kept
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Thursday, 06 April 2017 04:40 PM Current | Bio | Archive

Randell C. Doane, Esq. contributed to this article.

In some cases it may be difficult to allocate assets equally to children if the estate has a large business interest, home or other asset which should pass to only one of the children.

  • Assume Mom and Dad have a son and daughter whom they wish to treat equally.

  • Assume the family business is worth $10 million and is operated by the daughter with no involvement by the son.

  • Assume, also,  other assets are $4 million consisting of a home and investments. Their wish is that the total of $14 million be divided equally between their children. However, they also want the $10 million business to be allocated only to the daughter.

One possible solution is to give the son the $4 million of other assets and a $3 million ownership interest in the business. That solves the equality issue because each child will inherit $7 million of assets. However, in many cases that is not a workable solution because the children are being forced into a partnership which may cause friction in the future.

The daughter, who is operating the business, may resent that 30 percent of profits are paid to the son, who has no involvement with the business and does not contribute to its success.

On the other hand, the son may resent that a portion of his inheritance is tied up in his sister’s business which he may believe is not an appropriate investment for him.

Also, as a minority owner he may have no voice in the business decision making.

Forced partnerships such as this usually end badly, sometimes resulting in the failure of the business, and often ending in lifelong sibling resentment.

Another possible solution would be to grant the son a $3 million debt position in the business. In effect, the daughter would inherit the $10 million business, but it would be encumbered by a note payable to the son.

This may be a better solution because both the son and the daughter can foresee a time when the note is paid and the daughter will own her business unencumbered, and the son will have his entire inheritance in liquid form — to be invested as he wishes.

This is preferable to the son owning a 30 percent equity interest in a business in which he is not involved.

In most situations it is preferable to "cash out" the child (or children) not involved in the business. If there is insufficient liquidity to permit a cash-out, then life insurance is often the best solution. In our example, a $6 million policy that would pay when both spouses are deceased would solve the problem.

Then, the daughter could receive the $10 million business unencumbered, and the son could receive an equal inheritance of liquid assets. Additionally, the life insurance can be structured in a manner that will avoid all taxes on receipt of the insurance proceeds.

The same concept applies whenever there is a home, art collection, or other special asset which should pass to one child and its value exceeds that child’s equal share of the estate. Insurance is often the simplest and most cost-effective tool to solve the problem, and will frequently provide a significant tax advantage as a bonus.

Richard S. Bernstein, CEO of Richard S. Bernstein & Associates, Inc., West Palm Beach, is an insurance advisor for high net worth business leaders, families, businesses, municipalities, and charitable organizations. An insurance advisor to many of America’s wealthiest families, he is a writer, trusted local and national media resource and expert speaker on estate planning and health insurance. Visit his website at www.rbernstein.com. To read more of his reports — Click Here Now.

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In some cases it may be difficult to allocate assets equally to children if the estate has a large business interest, home or other asset which should pass to only one of the children.
insurance, life
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2017-40-06
Thursday, 06 April 2017 04:40 PM
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