Case Scenario
Sonya is the sole owner of Midwest Organic Orchard, which she inherited from her father. The business is a major asset in Sonya’s estate. Sonya is married to Keith, an engineer. They have three children, but only one child, their son Michael, has been actively involved in the operation of the orchard. Michael has been instrumental in expanding the business, including negotiating a multi-year contract with a national fast food chain that has substantially increased the profitability of the orchard.
Goals
- To pass the family business to Michael eventually.
- To treat Sonya and Keith’s other non-active children equitably.
- To avoid unnecessary income tax.
one or more children — but not to
others — can be a difficult task
for business owners.
A Possible Solution
Since other assets are available to support Sonya and Keith during their retirement, they do not need to sell Midwest Organic Orchard to Michael. A sale would require them to recognize some capital gains tax, so they would prefer to use another strategy. Sonya and Keith’s attorney suggests that Sonya gift the business to Michael over time. Every few years, she will give shares to him until he eventually owns the whole company. In their wills, Sonya and Keith provide for any remaining shares of Midwest Organic Orchard, that they still own, to pass to Michael.
Their financial professional suggests the purchase of whole life insurance to equalize the inheritance of the non-active children. In order for Sonya and Keith to determine an equitable inheritance amount, they must first look at what the value of their business might be. Consulting a properly credentialed appraiser who can provide a qualified business valuation is a good first step. Once the amount is determined, Sonya can apply for the insurance policy as owner and either name her non-active children or a trust for their benefit as policy beneficiary.
Whole life insurance may provide individuals the additional liquidity that can help to equalize inheritances. In this example, the value of Sonya’s estate does not exceed her lifetime exemption amount. Accordingly, Sonya can own the policy and therefore have access,1 if needed, to the policy's cash value.