Using Life Insurance to Save the Family Business

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

Now let’s look at a very common use of Life Insurance for Family Business owners:

Using Life Insurance to Save the Family Business

Many parents who have invested their life’s work in their own business dream that one day their children will follow in their footsteps, and take over the day-today management of the company.

Often, this simply isn’t the case.

A more typical scenario involves one child having an interest (or ability) to take over the family business, while one or more other siblings are interested in pursuing their own life goals.

Forcing all your children, regardless of their interest (or business acumen) to participate in running the family business for the sake of receiving their inheritance is often a recipe for disaster.

A far more sane (if less sentimental) approach is to hand over the reins of the family business to the child who shows the most interest/ability.

Using life insurance to “cash-out” the other heirs is an ideal way to preserve family harmony, as well as the continued viability of the family business.

Let’s take a look at an all-too-common scenario

Steve runs a very successful family business (Widget Co.) making widgets.  A recent appraisal valued the business at $6 million.

Steve has three children:  Andrew, Beverly and Christian.

Andrew, the oldest child, has worked side-by-side with his father Steve for the past fifteen years.

After college, Andrew worked for a competitor to Widget Co., learning the industry from the inside out.  After eight years, Andrew left his management position with the competitor to take over as the day-to-day operations manager of Widget Co.

Beverly married her college sweetheart, and they relocated to Boulder, Colorado, where they run an art gallery and support various local charities.

Christian has spent the past ten years abroad, teaching English as a Second Language to students in Romania, Greece and Turkey.

Here’s the dilemma:  Steve wants to divide his estate equally between his three children, but only Andrew is able to take over the family business.

Without an Estate Plan, Steve would be leaving two-thirds of the voting stock of Widget Co. in the hands of Beverly and Christian.  Andrew, who has dedicated his life to enhancing Widget Co.’s long-term value, would only have a minority stake.

Instead, Steve decides to purchase two $6 million life insurance policies, and name Beverly and Christian as the beneficiaries.

When Steve passes away, Andrew will own 100% of the voting stock of Widget Co., a $6 million asset.  Beverly and Christian will each have $6 million of cash.

Therefore, each child will have the same Inheritance amount, and Widget Co. will be 100% owned by someone who is vested in it’s long term success.

Family harmony is preserved, and the business is set up for success, all for the cost of the Life Insurance premiums.