I have previously written about using life insurance to equalize an estate, primarily for a business owner, but also for other situations. I recently came across a case study that illustrated a situation that I hadn’t thought of, and though while certainly not common, it seems that some variation of it wouldn’t be all that rare.
A business owner (a general contractor) was getting ready to retire to Florida. He was a recent widower with two children, a daughter age 31 and a son age 28. His most significant asset was his primary residence, worth, conservatively, $1.25 million and he also had a house in Florida worth $150,000 neither encumbered with a mortgage. His other qualified and non-qualified assets were worth just less than $1 million.
At issue was the family residence. He had built it 30 years ago and improved it with many amenities over the years. It was the scene of many happy family memories and the son wanted to purchase it, but couldn’t afford it. The daughter did not want the house as she lived in California and the house was in New Jersey. The father, a man with few wants, would have been happy to give it to his son, but for the disparity in the inheritance it would create.
The solution (in the case study) was for the father to sell the house to the son for $250,000, which was what the son could afford, and use his gift tax exclusion for the balance. He was then to gift his $1 million life insurance policy with cash value of $200,000 to his daughter with her as the sole beneficiary to equalize the estate.
This is a complex case and the case study didn’t address all issues, but it does illustrate the versatility of life insurance. He had originally procured it to protect his family, but his wife had since died and his children were now adults. The life insurance was now not needed for its original purpose, but having it gave him options that he might not otherwise have. He could have surrendered it for its cash value, but he chose to use it for a different purpose, to keep the family homestead in the family.
This would have been much harder, if not impossible, to accomplish had he not had the foresight to procure the whole life policy years ago. And that’s the point, that it does take foresight to see that it’s possible that the insurance you acquire today could ultimately serve a different purpose than originally planned.
So buy it while you’re young, planning that things go so well that you won’t need it for the purpose for which it was acquired, but knowing full well that it has the potential to provide you with options that you might not otherwise have.