The “estate” of most individuals is worth more than just money. A family business, a summer cabin on the lake or an antique car collection may be part of a legacy, rich with family history, that your client wants to pass on to his or her children and grandchildren. The challenge is to develop a plan that satisfies your client’s desire to pass along specific assets to certain individuals, while making sure each family beneficiary is treated fairly and equitably.
Individuals are often unaware of what the potential planning needs are and may not see the hidden stresses involving distribution of family assets, both tangible and intangible. These assets may not be easily dividable, may have fluctuating values and lack liquidity, as well as potential tax liabilities. The goal of an estate plan that involves estate equalization is to balance the desires of the parent(s) making bequests to certain individuals and the desire to maintain an equitable value to each heir.
The first step is to help your client decide how he or she wants the estate to be distributed. This takes careful planning and open discussion with family members and other advisors, such as an accountant, lawyer, real estate advisor, business valuation expert and possibly an expert in collectibles valuation. Each asset should be carefully considered with respect to its value (monetary as well as emotional) and the plan developed from there.
Consider a hypothetical client, Ellen, who is not married, and has two grown children. Ellen runs her own business with her son Jim, who is heavily involved in the business, and is prepared and willing to assume the role of owner upon Ellen’s death. Ellen’s daughter, Lilly, is a successful professional living in another state. Even if she moves back, Lilly has no experience with the business and does not anticipate being involved in its day-to-day operation.
Ellen’s estate is worth about $2.2 million: the business is valued at $1.5 million; and the remaining assets include Ellen’s home, her savings and some original art work that was recently appraised for $150,000. Ellen and Lilly share the same love for the art, and Ellen intends to pass the full art collection to Lilly.
If Ellen were to leave her business to both children, Jim may be forced to sell valuable assets in the business or to use business cash flow to compensate Lilly, which could compromise the business itself. Since Ellen does not know if she will use the value of her home and savings to provide for her retirement income, and possibly long term care expenses, leaving Lilly the remainder of the estate (including the art collection) after leaving the business to Jim does not seem fair.
Estate equalization with life insurance