Business Owners Suite · Estate Equalization
Business Transition
One child wants to run the company. The others do not. If the business is your largest asset, an equal division on paper can force the child who stays to sell it or borrow heavily against it in order to pay the others. Insurance proceeds are one way to pay the children who are not involved, so the one who is keeps the company intact.
Worth Knowing
Two points from the carrier material on what actually happens to a business interest when nothing is arranged in advance.
Where no agreement exists, the heirs of a deceased owner inherit that owner's shares even though they may have no wish to be part of the business, and the business itself risks an interest being sold to someone outside the current ownership. A funded agreement gives the heirs a pre-determined price instead of a role.
Source: North American Company for Life and Health Insurance, Buy-sell with life insurance, 215NM-3a
A frequent structure has a sole owner transferring the firm to the child who works in it, while a permanent policy provides for the child who does not. The business passes intact to the successor and the other heirs are provided for out of a separate asset, so neither outcome depends on selling the company.
Source: Life Insurance Company of the Southwest, SummitLife IUL Estate Planning Strategy, Cat No 106307
The Structure
What it does
A permanent policy with a death benefit sized against the company's value lets the heirs who are not in the business receive their share in cash, while the heir who is receives the company itself.
What has to be true
Equalization only feels equal if everyone accepts what the business is worth. That number is set with an independent valuation and documented in the estate plan, not left for the family to work out later.
Where it comes apart
Plans that surprise the heirs create the resentment they were designed to prevent. The conversation is uncomfortable once. The alternative is uncomfortable permanently.
Equal and fair are not always the same thing. A plan built well can deliver both.
Begin the Conversation
Whether your agreements are drafted, outdated, or still an intention, this conversation is private, unhurried, and specific to your company.
Important: This page is general education. It is not legal, tax, accounting, or individualized financial advice. Buy-sell agreements, split dollar arrangements, deferred compensation plans, and trusts should be drafted by a qualified attorney, with tax treatment confirmed by a qualified tax professional. Life insurance policies contain costs, charges, limitations, exclusions, and conditions; coverage depends on underwriting and on the terms of the policy issued. Guarantees are backed by the claims-paying ability of the issuing insurance company. Policy loans and withdrawals reduce cash value and death benefit, are subject to interest charges, and are generally not subject to income tax provided the contract is not a Modified Endowment Contract as defined by Section 7702A of the Internal Revenue Code. Distributions from a Modified Endowment Contract are taxable to the extent of gain and may carry an additional tax before age 59 and a half. Carrier material referenced on this page is cited to its published form number.