Say that a business owner has a daughter who will eventually own the company and a son who has no interest in the business. This owner faces an estate planning challenge because he doesn’t have enough assets outside of the business to leave his son an equal inheritance. Now, there are a number of solutions. A more complex one is leaving the business to both children and have the daughter buy out her brother’s interest. A simpler solution is for the owner to purchase a permanent life insurance policy designating his son as beneficiary.
Vacation property can pose a similar estate planning challenge. Suppose that the property owner has one child who dreams of owning the summer home and another child who lives out of province and has no interest in the property. Now the vacation property has become an indivisible asset. The owner, to equalize the inheritance, needs to designate assets to the child living out of province – perhaps using investment funds, a life insurance policy or even the principal residence.
Two sets of heirs
Sometimes it’s the nature of the family – or families – that calls for an estate equalization strategy. Say you’re in a second marriage and have children from your first. The expectation is that your spouse will be the primary beneficiary of your estate, but you wish to leave a sizable inheritance to your children from your first marriage. One solution is to establish a spousal trust where your spouse receives lifetime income and, after your spouse passes, your children receive remaining capital. Another strategy is to make your children beneficiaries of a life insurance policy, so they receive their inheritance right away.
Communication is key
When you develop a strategy to balance an inheritance, it’s important to communicate the plan to your heirs. This way, you’ll find out if everyone is satisfied – if someone is not, you’ll have time to find a resolution. For example, let’s return to the business owner who gives the business to his daughter and leaves his son an insurance policy. Though the insurance amount is significant, it’s purposely less than the value of the business. The parent rationalizes that running the business takes an ongoing commitment and countless extra hours of work, whereas the inheritance from an insurance policy is simply money in the bank. But the son questions the difference in the two inheritances. You’ve discovered a problem, and you can try to find a solution that’s agreeable to everyone. Without this communication, you risk causing discord among your children after you’re gone, and possibly the contesting of your will.
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This article was originally published in November 2018 at https://www.investmentplanningcounsel.ca/and supplied by Scott Penney, PFP® and Wealth Advisor with Investment Planning Counsel of Canada.