The hidden role of insurance in estate equality

A topic rarely thought about, but within family businesses, often not all the children necessarily work in the business. It is not unusual to have one child following in the family footsteps and taking over the business over time, whilst others forge their own path in life.

But how does this work when it comes to succession and estate planning? To what extent would the child in the business benefit relative to a child not in the business?

Family business owners may face a difficult choice in estate planning: end up with childing owning the business that have no active involvement in it, keep the business in the family and risk leaving some children short-changed, or sell the business to create a cash pool that can be divided fairly.

Personal insurance, thoughtfully structured, can create a third option. It creates the liquidity needed to equalise inheritances without forcing a sale, using cash reserves or borrowing money, helps fund buy-sell arrangements, and protects both the business and family relationships when the unexpected happens.

Worked example (simplified)

Our scenario is a family business worth $2,000,000. The owner has three children and intends the business to remain with Child A (who is actively involved in the business).

The goal is to provide each child with an equal economic share (i.e. $666,667 each), while allowing Child A to retain the business.

The solution – owner takes a life insurance policy for $1,333,334 payable to the estate or directly to the two non-active children, enabling each non-active child to receive their share without requiring the business to be sold.

Note, there are other areas that need consideration such as trigger events, tax consequences, ownership structure, valuation methods etc. But for the purpose of this blog, we are keeping it simple.

In this example, we ensure that the two non-active children receive their equal share of the original $2,000,000. However, Child A now has a business worth $2,000,000.

If you wanted each child to receive $2,000,000, you would then need a policy for $4,000,000. This comes down to preference and cost, but many families simply aim for equal shares of the existing estate.

Why this works

Similar to buy/sell agreements between business partners, this type of structure provides immediate cash when needed, which can avoid a forced sale or borrowing against the business.

Further to this, it can reduce family tension by giving non-active children a fair, tangible outcome while letting the active child/s continue the business.

Call to action

Own a family business and you find yourself in this situation? Lets sit down together and work through the solutions.