Succession Planning for Family Business: Estate Equalization [Using Life Insurance]

by Dave Henry

Updated January 5, 2024, at 10:59 AM

Succession planning for a family business is often top-of-mind for business-owning clients as they near retirement.

And for good reason.

Family business succession plans are vital not only to your client, but their entire family to preserve harmony and execute business continuity. And one strategy to distribute business-owning estate is estate equalization using life insurance.

Let’s dive into this concept and go over the ideal client profile, key selling points, an estate equalization case study, and more to help you determine when or if this strategy may fit a client’s situation.

Estate Equalization: Succession Planning for a Family Business

When you take on the task of succession planning for a family business, it’s common for one or more of your client’s children to no longer want to be involved in that business.

A family’s business succession plan runs the risk of being dissolved because of conflicts over desired inheritances once the founders pass away.

Life insurance can provide liquidity to fairly treat other siblings who have no desire to take over the family business. The life insurance policy can be held inside or outside the owner’s estate (using an irrevocable life insurance trust). It’ll provide cash instead of business shares to the heirs not interested in becoming a part of the family business.

This equal treatment preserves long-term family harmony and unity while providing succession planning for a family business. This strategy can also be used for any estate that wishes to pass on an illiquid asset to only one child but desires to avoid inequalities in the inheritances of other children.

Related: Ways to Get Clients Thinking About Multi-Generational Wealth Planning

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Client Profile for Estate Equalization Using Life Insurance

The client should be 50 or over, near or in retirement, and in average to good health. They should have an estate that requires liquid assets to provide equal distributions to family members at death.

The client should also hold a strong desire to be fair to all family members and to see the family business or real estate remain in the family and not have to be sold.

Key Selling Points

  • The potential to significantly increase the after-tax amount that passes on to heirs as the life insurance death benefit isn’t subject to income taxes
  • The ability to move these assets outside the estate if desired and protect the life insurance death benefit from estate taxes
  • Could consider an individual or a survivorship life insurance policy with this strategy
  • Long-term care, chronic illness riders, or accelerated death benefits can provide access to the pool of money if the insured develops a qualifying illness and if the policy ownership is structured to allow them access to those funds

Case Study: Succession Planning for Family Business With Estate Equalization

Tom and Cathy have four grown kids and have run a home-building business for over 30 years. Two of their kids are heavily involved in the family business, while the others aren’t and live several hours away.

Tom and Cathy are concerned that when they pass away, their kids may struggle to fairly determine what to do with the $4,000,000 family business without causing animosity amongst them.

Through their trusted financial advisor, they learn how life insurance can provide liquidity that allows the two kids who don’t want to be a part of the family business to receive an equal share (estate equalization) in cash versus company stock and enable the business to stay running rather than sold.

They purchase a life insurance policy with a $2,500,000 death benefit, which equals 50% of the estimated future value of the company, and the company pays the premiums.

The two children who want to carry on the family business can own the company after Tom and Cathy’s passing. The two additional siblings that don’t will not be involved in the business.

In the end, with estate equalization, the two parents are at peace. They’ve met their goal to have the family stay close while treating everyone fairly.

Related: IUL vs. Whole Life Insurance: What are the Differences?

Client Comments to Watch For

If you have clients planning for retirement and own a business, it’s prudent to have the family business succession planning conversation.

Here are some comments clients may make. These will let you know they’re ready to talk about succession planning for their family business:

“Not all of our kids are involved in the family business.”

“I wish our daughter could keep the condo we own, but our son doesn’t like to vacation there.”

“I don’t think our kids would make great business partners.”

“How do we treat our children fairly so they stay close?”

Right Questions to Ask

If your clients aren’t bringing up those comments, you can still spark the family business succession planning conversation. Try asking pertinent questions like:

“Do you have any assets, real estate, or business interests that not all your kids may want after you pass?”

“What are your fears about your children when they inherit your estate?”

“Would you like to explore how life insurance can create a pool of cash that can equalize each heir’s portion and ease family tensions?”

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