Estate Planning

Equalizing Inheritances with a Family Business

Father and two sons laughing in the backyard
 

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.

Finding the equal and fair solution    

Your SunTrust Private Wealth advisor can help determine an inheritance plan that works for your family

1 Interest will be charged on policy loans. Loans, loan interest and unpaid premiums will be deducted from the final death benefit upon the death of the insured or from the cash value upon surrender. Refer to policy for complete details.

Insurance products and services are offered through SunTrust Investment Services, Inc., a licensed insurance agency. They are not insured by the FDIC or any other government agency, are not a deposit of the bank or guaranteed by the bank, and are not a condition to any banking service or activity.

SunTrust Bank and its affiliates and the directors, officers, employees and agents of SunTrust Bank and its affiliates (collectively, "SunTrust") are not permitted to give legal or tax advice. Clients of SunTrust should consult with their legal and tax advisors prior to entering into any financial transaction.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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