Consider a scenario where a family business owner grapples with how to equalize inheritances for his four children; two are active in the business while two have careers separate from the family business. Most of the family wealth, which is illiquid, is tied to the business. Upon the death of the parents, the family faces the vexing problem of how to provide the children with equitable shares of the business without liquidating the business.
Buyout Inactive Successor Owners
One approach would be to leave it to the siblings who are running the business to buy out their other siblings. This raises a number of issues, including assessing the fair market value of the business, determining the length of the payout period and whether interest would be paid until the buyout is complete. A real concern would be the prospect of short selling some or most of the business’ assets to buyout the siblings who are not active.
Another alternative is to leave the business to all four children equally. This presents another set of challenges as the two active children would now have to involve their inactive siblings in the business’ decision making. Further, the business may not be able to financially support everyone. If that was the case, the wishes of the business owner for continuity and family harmony would be in jeopardy.
Survivorship & Single Life Policies Solutions
A simple, more elegant solution is for the business to purchase life insurance on the owner, naming the children who are not active in the business as the beneficiaries. If the spouse is alive or the owner has significant health issues, a survivorship policy might be the appropriate choice. The policy could also be purchased personally and put in an irrevocable life insurance trust. In this case, the amount of the coverage would be equal to 50% of the fair market value of the business, split between the two inactive children. Upon the death of the business owner (for a single life policy) and the spouse (for a survivorship policy), the two children operating the business would inherit the business, while the other children would each receive 25% of the tax-free death benefit of the life insurance policy. The business continues on, and each child receives an equitable inheritance.
With the help of a professional advisory team, including a CPA, attorney, financial planner and insurance agent, an estate equalization plan (also known as an inheritance equalization plan) can be developed to pass on a family business, allowing the owner to enjoy their wealth and success while ensuring that the next generation is taken care of – whether or not they are involved in the business.
- The Five Biggest Myths About Life Insurance (blog)
- Exit Here: Selecting the Best Method for Leaving Your Business (article)
- Building and Maintaining a Solid Family Business (article)
Don’t hesitate to reach out to Anne Long, President of CBIZ Life Insurance Solutions or her CLI team for insights about life insurance as a business tool. You can reach Anne at firstname.lastname@example.org and (512) 784-4001.