Estate planning often involves complicated steps to reach a simple goal. For many clients, the objective of a wealth transfer is to leave their loved ones with an equal share of assets. However, as financial professionals know, this can be much easier said than done.
When most people think of inheritance, the first image to come to mind is a dollar sign. However, estates typically contain far more than money that needs to be dispersed, and this is where things can get difficult.
For instance, say your client’s estate includes a family business, vacation home or prized wine collection. Figuring out how to divide these assets up properly so everyone receives an equal share is bound to come with some challenges.
Then there are the values of the assets to consider. Besides being difficult to divide, some assets may feature fluctuating values and a lack of liquidity. There may also be potential tax liabilities that could burden beneficiaries if the transfer is not structured properly.
However, the biggest hurdle financial professionals will need to help their clients clear involves the avoidance of familial disputes. If one beneficiary is thought to be receiving more than their fair share, it can lead to animosity among loved ones, and sometimes even litigation – one outcome every client is sure to want to avoid.
Estate equalization through life insurance
By implementing a life insurance policy as a part of an overall estate plan, clients can rest easy knowing inheritances will be balanced between beneficiaries. Some assets are simply problematic to liquidate, but the death benefit from a life insurance policy can offer clients the liquidity they need to ensure inheritances are equal.
Such a strategy comes with many added benefits as well. For instance, the return on premiums may offer heirs more money than they might otherwise get from taxable assets. In most cases, life insurance provides benefits that are free of income taxes, reducing the burden on estates and resulting in more money for beneficiaries.
The tax advantages carry over to cash value generated through policies, as this money will grow tax deferred. Additionally, tax-free loans and withdrawals are permitted through life insurance policies.
And, of course, life insurance coverage offers plenty of benefits to individuals well beyond estate planning. In the event of a premature passing, life insurance will be on hand to help loved ones handle expenses and maintain their lifestyles. Policies can also be used as outstanding investment vehicles for retirement when structured properly.
Assist clients in their decision
While estate equalization offers many benefits, it’s important for producers to help their clients determine if it’s appropriate for their specific needs.
For example, estate equalization is well-suited toward business owners. If your client’s business accounts for more than half their net worth and they would like to keep the enterprise in the family, this strategy may be the ideal solution. A business is very difficult to divide up among heirs, especially when there are likely family members who are not involved with its operation or posses the experience to manage it directly.
If estate equalization is a good fit for your client, it’s vital to structure the process properly. The first step will likely be helping your client choose the right level of death benefit protection for the estate. Asset values can change from year to year, and the number of beneficiaries can fluctuate as well. Selecting the right amount requires careful forward planning.
Another factor to keep in mind is that qualifying for a life insurance policy isn’t a given for your client. They will need to meet certain underwriting requirements, something that may be easier when they’re younger and in better health. It’s for this reason that producers should speak to their clients about the potential of estate equalization sooner rather than later.