The Benefits and Challenges of Estate Equalization

Estate distributions are about more than money and assets—and wealthy individuals may find it difficult to form a long-term strategy that’s fair to everyone. This is where estate equalization comes in.

Many estate plans have a goal of being fair to every beneficiary. Wealthy individuals bequeath assets in hopes of creating security and peace of mind for their loved ones, and the last thing they want is for their gift to become a source of contention or resentment. Sadly, the division of an estate is no stranger to acrimonious outcomes.

Some beneficiaries may feel unfairly treated. Some may even instigate legal proceedings to contest the plan which can sap the wealth of all concerned.

This can dilute or defeat the purpose of wealth transfer, but the situation may be mitigated—or entirely avoided—by proper estate equalization.

Liquidize to equalize

Equalization is easier if all of an estate’s wealth is liquid; simply split the wealth however many ways and the goal is achieved. Things become more difficult where assets such as real estate are left to two or more people.

One heir may be happy to live there. One may want to generate wealth by renting space. Another may want to sell. Cue conflict and potential battles for control. Estate equalization (and harmony among beneficiaries) may be easier to achieve if the property is liquidated and the cash split equitably among the heirs.

Wealthy individuals who own businesses are faced with a few possible choices. They could voluntarily liquidate the business and distribute the funds among all heirs. Alternatively, the organization might be bequeathed to some heirs who serve in executive roles.

But what about heirs with no direct interest in the business? They may feel excluded from the control of a lucrative enterprise with great potential for wealth generation. This is where a third equalizer can help:

Life insurance as an estate equalizer

Let’s say an individual owns a business valued at $5 million and they have four children. Two work in the business; two don’t. That business is passed to the first two heirs since they have the acumen and skill to maintain it. Should the remaining estate also equal $5 million, the plan may split those assets between the other heirs.

If the non-business assets account for less than $5 million, this could cause conflict. In this case, a life insurance policy in the appropriate amount can be an effective means of estate equalization. This not only solves the equal-inheritance issue, but there are further advantages: the policy’s death benefit is received income tax-free and, if properly structured, will not be subject to estate tax.

There may still be an argument over inequality, however. The non-business heirs may see their inheritance as something static, while the two business heirs get something that will keep making far more money beyond its base value. This needn’t be the case.

See every estate gift as potentially ongoing

With careful investment practices, the “static” amount received by beneficiaries can, of course, become more—sometimes a great deal more—over time. The projected value of assets is an important way to look at things and a critical planning component of estate equalization, especially where life insurance is involved.

And just as the sum at death isn’t fixed, the lives of your beneficiaries can also be fluid. For example, some of your current heirs may be planning on having children, creating new potential heirs whose future needs must also be considered.

The diversity of heirs and unpredictability of life can make estate equality complex. But adequate planning and communication can head off many issues that arise during distribution.

Communication is crucial for equality

There’s what’s equal and what’s fair—and sometimes those are different things. And a heart-to-heart talk with your beneficiaries about your intentions and their plans and goals can greatly ease equalization stress.

Articulating your objectives to your advisors (a Trust & Estate attorney, a life insurance advisor, an investment advisor/family office, and a CPA) will allow them to create a plan that treats your heirs in the manner you deem equitable.

In the end, communication, adequate planning, a smart estate-plan structure, and sound financial advice are the best hopes for successful estate equalization.

Lindberg & Ripple offers customized wealth management, investment, and insurance solutions to wealthy families and successful businesses. We help our clients craft a comprehensive wealth planning model to achieve their financial goals with minimum fuss and maximum savings. To learn more, connect with us.

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