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Estate equalization

Estate equalization: Fair (but not equal) treatment

Estate equalization is needed when a business owner wants to treat their children fairly, but may not be able to do so equally.

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What is estate equalization?

A business owner may plan to pass on their business to a child who wants to continue the business after they die, but they have other children who they want to gift their assets to. Estate equalization makes sure all the beneficiaries get a fair share.

Benefits of estate equalization

  • Business is in the estate until death(s) of the parent(s).
  • Successor child receives a full step-up in basis in the business.

Considerations of estate equalization

  • Estate tax ramifications because the operation is within the parent’s estate.
  • Parent will need to pay (and possibly gift) the premiums.

Target client

Business owners and farmers and ranchers who want to control the business during their lifetime and has identified a child(ren) to receive the business upon their death.

Additional estate planning strategies

BOLD highlights several different estate planning strategies to fit your clients needs.

View all strategies

How does it work?

Estate equalization is needed when the business owner wants to treat his or her children fairly but maybe not equally.

Here, the owner bequeaths the business to a child who wishes to continue the business. The rest of the assets then will be split among the other children.

Since a large amount of the estate will go to the one child, the owner can equalize the estate by purchasing a life insurance policy and naming the remaining children as beneficiaries of the policy.

  • Parent (and spouse) bequeath(s) the business to successor child at death of both spouses. 
  • Parent(s) then set up a life insurance arrangement or ILIT for the benefit of the other children.
    The arrangement or ILIT is typically funded with a second-to-die life insurance policy.

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Present estate equalization to clients

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Additional resources for estate equalization

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Life insurance products contain fees, such as mortality and expense charges, (which may increase over time) and may contain restrictions, such as surrender periods.

Please keep in mind that the primary reason for purchasing life insurance is the death benefit.

Additional agreements may be available. Agreements may be subject to additional costs and restrictions. Agreements may not be available in all states or may exist under a different name in various states and may not be available in combination with other agreements.

Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. Clients should consult their tax advisor when considering taking a policy loan or withdrawal.

The Policy Design chosen may impact the tax status of the policy. If too much premium is paid, the policy could become a modified endowment contract (MEC). Distributions from a MEC may be taxable and if the taxpayer is under the age of 59 ½ may also be subject to an additional 10% penalty tax.    

An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as surrender charges (deferred sales charges) for early withdrawals.

This information may contain a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.

For financial professional use only. Not for use with the public. This material may not be reproduced in any way where it would be accessible to the general public.

DOFU 10-2022

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