Estate Equalization

Matt Erpelding   |   September 2021   |   1-minute read
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The story

An advisor was asked by Donald, one of his best clients over the years and a successful business owner; “My son, David, is in line to inherit the business. What do I do about my daughter, Laura, who’s not in the business and will never want to be in the business? How do I balance what each of the kids inherit? Is there a way I can use the business to help make sure Laura gets her fair share?”

Donald and his wife had just the two children and desire to split the estate equally between the kids. The advisor recognized that life insurance was the perfect instrument for providing a lump sum amount to a trust set up to benefit Laura. The client’s net worth was $4,000,000, and comprised of $3,000,000 of business assets, $400,000 in real estate, and $600,000 in investable assets

The strategy

After reviewing several of the advisor’s proposals, Donald decided a split-dollar arrangement to be the best course of action because he wanted the business to be responsible for premium payments. The plan allowed Donald’s business to pay for the life insurance premiums, while a trust set up to benefit Laura would own the policy and only pay taxes on the economic benefit of the death benefit. The death benefit was set at $3,000,000 which was equivalent to the business value. It included a return of premium rider so that the business would ultimately recover its costs.

Why insurance?

Insurance is a perfect solution to an estate equalization problem because it provides a known benefit amount at precisely the right time. The life insurance policy premiums are fixed and the death benefit is known throughout the life of the contract. Uncertainty is eliminated and fairness is achieved.

Life insurance provides a known benefit amount at precisely the right time. Policy premiums are fixed and death benefit is known throughout life of contract.

The result

  • Total death benefit for Laura’s benefit: $3,000,000
  • Business value inherited by David: $3,000,000
  • Annual life insurance premium: $92,000 paid by the business

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Matt Erpelding
About the Author

Matt Erpedling has been with Ash since 2005, developing a broad-based understanding of life insurance and advanced markets strategies. His primary focus is answering advanced markets questions, working closely to develop strategies that tie in the proper product and design to fulfill client planning needs.