Andrew and Lilly are in their mid-sixties with an estate worth $6.5 million. The lion’s share of their wealth ($4 million) is in the form of equity built up in the family’s automobile dealership. The couple’s oldest son, Michael, has worked at the dealership since graduating college and plans to take over the business when Andrew retires. Their younger son Peter, however, chose to pursue his passion working with disadvantaged inner city children.
Like most parents, Andrew and Lilly want to ensure an equal and equitable distribution of their wealth to both of their children when they die. As many business owners quickly come to realize, however, what appears a relatively straightforward objective can quickly become a complex undertaking. If they leave the business to Michael and the rest of their assets to Peter, the inheritances would be far from even.
Certainly the couple could just bequeath half of their assets (a $2 million interest in the business and $1.25 million in other assets) to each child. It’s equal, but is it fair? Will Michael resent having his brother own half the business he’s worked a decade to help grow? Conversely, might Peter worry that his brother is slowly eroding the value of the business by drawing a large salary and making unnecessary expenditures? As you can see—it’s a situation that’s fraught with the potential for family strife.
Searching for a better solution
At SunTrust, we encounter situations like this hypothetical example on a regular basis. Estate planning can be especially challenging when most of a family’s wealth is tied up in illiquid assets like a family business. But there ARE solutions to these types of dilemmas; the most common approach is to utilize life insurance to help create a tension-free and equitable distribution of wealth.
In the previous example, Andrew and Lilly could simply purchase a $1.5 million life insurance policy that pays out a death benefit upon the second spouse’s death, with Peter as the named beneficiary of the policy. That would allow the couple to leave the entire $4M business to Michael, with Peter receiving the $2.5M of other non-business assets as well as the $1.5M insurance policy death benefit.
Depending on the type of life insurance policy you purchase, it may have 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 of 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 SunTrust advisor will be able to craft an inheritance solution that is both equal and fair for your heirs.