Using Life Insurance to Equalize an Estate

In our prior posts, we discussed how there are many Uses of Life Insurance in Estate Planning, including Estate Creation and Liquidity to Pay Estate Tax.

Now, let’s look at a strategy that works for middle class families as well as for the affluent:

Using Life Insurance to Equalize an Estate

For many families, the bulk of their estate is made up of assets that aren’t easily divided among heirs, such as the family residence.

Often, one heir has expressed an interest in preserving the asset, while others would prefer cash instead.

Life insurance may allow you to divide your estate equally among your heirs, while reducing the need to divide assets or provide for joint ownership.

Let’s look at an Example of how this might work:

Mom and Dad have lived in their Saratoga home since 1969.

The house is currently worth $1,000,000, with a $100,000 mortgage.

Due to Proposition 13, the property taxes are a fraction of what they are for other homes in the neighborhood.

Mom and Dad have three kids:  Alice, Bobby, and Sally.

Bobby is unemployed, and lives at home with Mom and Dad.  Alice and Sally are married, and living in other cities.

Upon the death of Mom and Dad, they would like Bobby to be able to live in the house, but want to be fair to Sally and Alice, who don’t need a house.

However, he only way Bobby would be able to buy the house from his parent’s Estate would be to pay his sisters $600,000 – their two-thirds of the equity in the home.

Because he is unemployed, he can’t qualify for a mortgage that would allow him to buy out his sisters.

So how can Mom and Dad be fair to all of their children?

Simple.  They can buy a $1,800,000 death benefit Life Insurance policy, which will pay on death to Alice and Sally.

Then, they can leave the house directly to Bobby.

Each child will then have an asset worth $900,000 – Bobby has the house, and Alice and Sally have cash.

Family harmony is preserved for the cost of the insurance premium.