The Fine Art of Estate Equalization

The Fine Art of Estate Equalization

Crafting an estate plan that satisfies all of your heirs can be challenging. An unequal estate could mean that your legacy is compromised, especially if you own a business. Consider every angle in advance for the fairest outcome.

One of the trickiest components of estate planning can be knowing how to divide assets among beneficiaries.

It’s wise to revisit your estate plan to ensure equalization. It’s not enough to focus on tax implications, especially if you have a large estate or a business to pass down the line. While creating a truly equal inheritance plan can be challenging—especially when only certain heirs can perform specific responsibilities for your estate or business—an approach like utilizing life insurance could be the answer.

What is estate equalization?

Estate equalization does not necessarily mean that all heirs receive the same amount of money or proportion of assets after you’re gone. It means that the value of what they receive after you die is equitable and equal in value.

Value can mean different things to different heirs. For example, some family members may care more about a property or possession for its emotional worth, not its monetary value. Of course, these values and priorities can be hard to measure, making it even more challenging to create an equal and fair estate plan.

Equalizing a business legacy with life insurance

If you run a business and hope that it continues in the family for generations to come, there are some special considerations when estate planning. The fact is, some of your heirs may not always want to be part of the company. When you are gone, it’s not as simple as dividing up what the business is worth. It is not a liquid asset.

You first need to create a succession plan that outlines who will take over and what roles and responsibilities other heirs will (or won’t) have.

When it comes to estate planning, you may think that your two options would be to leave the business to all heirs equally or leave it only to the children capable of running it. But these two options are not always equitable.

If specific children or family members are involved in your business, and others aren’t, one solution is creating equalization via life insurance. This means setting up a plan so that the heirs involved in the company will get equity passed down to them. Heirs who are not will be able to receive the same value of inheritance from life insurance benefits, as well as assets unrelated to the business.

It’s a delicate combination that must be planned with care, mainly because the non-business liquid assets will be unequally distributed to make up for the business inheritance.

Without ensuring that the inheritance plan is equal and fair, your legacy—and the future of the business you’ve created—will be uncertain. It’s crucial to plan ahead.

Primary goals are to protect the business after you’re gone with the right leadership and ensure your family members will not end up in conflict with each other.

Creating an estate equalization plan

These matters can be complicated and emotional. You may decide to involve your children or other family members in the planning process to understand their commitment to the business or the sentimental value of a particular property. To ensure that your family can peacefully uphold your legacy after you’re gone, it’s wise to understand their priorities and goals. You can then start understanding how to balance liquid and illiquid assets.

Other considerations are related to avoiding a significant tax burden for your family when you pass away. The professionals at Provident CPA and Business Advisors can help with the tax aspects of estate planning.

Contact the Provident team to learn more.