Equalizing Inheritances with a Family Business

Investing and Retirement Planning

Andrew and Lilly are in their mid-sixties with an estate worth $6.5 million. Most of their wealth ($4 million) is tied up in ownership of the family’s automobile dealership. The couple’s oldest son, Michael, has worked at the dealership since graduating college.  The family has discussed and Michael has declared his intent to take over the business when Andrew retires. Their younger son Peter, however, is pursuing his passion for social work with disadvantaged kids.

Like most parents, Andrew and Lilly want to ensure an equal and equitable distribution of their wealth when they die. But as many business owners discover, creating equal inheritances isn’t a simple undertaking. If they leave the business to Michael and the rest of their assets to Peter, the inheritances would be far from even.

Alternatively, they could bequeath half of their assets (a $2 million interest in the business and $1.25 million in other assets) to each child. It would solve the inequality, but is it fair? Michael could resent having his brother own half of the business he’s worked a decade to help grow? Peter, on the other hand, might worry about his brother reducing the value of the business by taking a large salary and making unnecessary expenditures? It’s a situation that would set up a greater potential for family strife.

Searching for a better solution

At Truist Wealth, we come across situations like this hypothetical example on a regular basis. Estate planning can be especially challenging when a great deal of a family’s wealth is tied up in illiquid assets like a family business. But there ARE solutions to these types of predicaments. The most common approach is to use life insurance to help create a tension-free and equitable distribution of wealth.

Using the previous example, here’s how it would work:

  1. Andrew and Lilly purchase a $1.5 million life insurance policy that pays out a death benefit upon the second spouse’s death;
  2. They name Peter as the sole beneficiary of the policy;
  3. They can then leave the entire $4 million business to Michael; and
  4. Peter receives the $2.5M of other non-business assets along with the $1.5 million insurance policy death benefit.

Depending on the type of life insurance policy you purchase, it may build up cash value that you can access through tax-free loans and withdrawals.1 And if properly structured, the policy will allow your beneficiaries to receive the death benefit free from income or estate taxes.

The sooner you begin planning, the more options you’ll have available to you and the greater the likelihood that you and your Truist Wealth advisor will be able to craft an inheritance solution that’s both equal and fair for your heirs.

Interested in learning more about estate planning and wealth transfer? 

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