Two cakes are better than one
Estate equalization can help you create a cash inheritance that matches the value of your existing assets.
How do you fairly distribute your estate if your main asset is your company’s shares, and only one of your children works in the business? When it comes to wealth transfer, creating equivalent value is arguably superior to dividing an illiquid asset.*
Profile
PCS by Mercer client is an entrepreneur nearing retirement. He is the founder and majority shareholder of a successful business, and his shares in the company are presently valued at USD10M.
Married with two adult children, our client is planning to retire in the next few years. His daughter works in the business and his son pursues an entirely unrelated career. Neither child currently holds any company shares, but the daughter is paid a salary and bonus commensurate to her senior position in the business.
Key considerations/challenges specific to the client
Our client is actively planning his retirement and has been grappling with how best to divide his estate given only one of his children actively contributes to the source of their family wealth. Specifically:
- The client and his wife encouraged their children to pursue careers aligned with their interests and did not pressure either of them to join the family business.
- The siblings have enjoyed a largely harmonious relationship, and the client is very motivated to preserve a calm family atmosphere.
- The client fundamentally believes in being fair and equitable, and strongly wishes to ensure the heirs receive as equal an inheritance as possible.
- He has a strong preference for keeping his majority voting shares together as he believes organizations thrive under strong leaders.
- He is grooming his daughter to take over when he retires and believes she will be ready to do so.
PCS by Mercer Solution
Solution: Whole of Life policy with the son named as the sole beneficiary.
Premium: USD1.5-3M paid by cash. The premium amount depends on the payment mode the client selects (single payment, five-, or 10-year options are available) as well as the results of his medical. Ideal health conditions with a single payment of premium would achieve the most competitive premium.
Total sum assured: USD10M death benefit with potential policy value accumulation. We note – depending on the payout date and the premium payment mode elected, the policy value may eventually outperform the death benefits. The policy value goes to the named beneficiary – the son.
Key takeaways:
Using estate equalization, and by naming his son as the sole beneficiary, our client is able to ensure an amount equivalent to his company shareholdings goes directly to his son, who does not and has never worked in the business.
In this case, the death benefit will not be a tax liability for the estate, which minimizes possible dispute opportunities, and enhances the principle of equity. The pay out will occur outside the probate process.
The client has also achieved a smooth future ownership transition, which helps to prevent business fragmentation.
Most importantly, our client is leaving an enduring example and legacy of fairness to his heirs.