Estate equalization using life insurance is a strategy used in inheritance planning to ensure a fair distribution of assets among heirs, especially when a business or other substantial assets make equal division challenging.
By providing liquidity, life insurance helps balance inheritances, trim potential conflicts, and preserve family accord.
This approach is used when some heirs are involved in a family business while others are not.
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What is estate equalization?
If you plan to leave certain assets to specific heirs, you might worry that the distribution won’t feel fair to everyone.
Estate equalization addresses this by providing heirs with assets of equal value rather than identical ones.
For example, if your business makes up most of your estate and you wish to leave it to one child, life insurance can be used to provide another child with assets of comparable value.
Estate Equalization Using Life Insurance Explained
How to use life insurance for estate equalization
Life insurance can help offset the unequal tax burden when one child inherits an asset that would trigger higher capital gains taxes upon sale.
It provides immediate, tax-free liquidity to heirs, which can also be used to settle estate taxes or outstanding debts.
A business owner, for instance, might take out a life insurance policy and name the non-business-involved children as beneficiaries.
The policy’s death benefit can then be used to ensure a more balanced and fair inheritance among all heirs.
To reduce estate taxes and manage how the funds are distributed, life insurance policies are often placed in irrevocable trusts.
Depending on the planning goals, policies may also be owned directly by the business owner or by the heirs themselves.
Life insurance offers a predictable payout at a critical time. One key advantage is that proceeds are typically disbursed quickly and bypass probate, offering immediate liquidity when it’s most needed.
Keep in mind that the cost of life insurance rises with age, so early planning can help secure better coverage at a lower cost.
Estate Equalisation Strategies
- Assess the fair market value of any illiquid assets, such as a business or real estate.
- Align the life insurance death benefit with the value of these assets.
- Explore ownership options, such as placing the policy in a trust or having it owned by the business, to maximize tax efficiency.
- Collaborate with estate planning attorneys and financial advisors to properly structure the insurance policy and any associated trusts.
Estate Equalization with Life Insurance Benefits
Heirs can receive inheritances of equal value, even if the types of assets they inherit differ. With fixed premiums and guaranteed death benefits, life insurance removes ambiguity around asset valuation and helps prevent disputes.
Policies can also be customized to support a blended family, provide for a special needs beneficiary, or fulfill charitable intentions.
While estate equalization using life insurance offers several benefits, do note that there are also certain disadvantages like if the policy isn’t properly structured. Here, the death benefit may be included in the taxable estate that could lead to a higher estate tax liability.
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