It’s not uncommon that your wishes as a farm owner would be to pass the running of your business to one but not all of your children. However, doing so in a fair and equitable manner can be challenging.
Estate equalisation is specifically concerned with this matter. The strategy involves advance planning by you as the business owner / parent, to avoid any family disputes or the unnecessary need to sell the asset that you’ve worked so hard to create and maintain.
Estate equalisation is the process where one asset e.g., the family farm), is bequeathed to one child and an asset of equivalent value is bequeathed to the other(s). The method of providing this ‘asset of equivalent value’ using life insurance is a practical solution. The value of the insurance policy is realised on the death of the parent insured, who is the business owner, and is the amount of insurance cover.
How it works?
A life insurance policy is purchased to ensure that the estate is distributed equally, and each member of the family is treated fairly. The member(s) of the family with an interest in the estate, inherits the family farm or family assets, while other members are bequeathed an equivalent value to the estate from the life insurance policy.
Both the business and the beneficiaries benefit from estate equalisation
For the business it protects the value of the estate since assets do not have to be sold. This also protects the continuity and value of the family farm, as it does not need to be split between beneficiaries – some of whom may not be interested in the business.
The beneficiaries benefit from estate equalisation as it helps maintain trust and confidence amongst beneficiaries by preventing family dispute over inheritance. This also offers financial security for beneficiaries not interested in family business, by providing cash to equalise inheritance among beneficiaries.
Case Study - John and Linda’s failure to plan
John and Linda run the family farm, passed on to them from Linda’s parents over forty years ago. Their son Matthew works on the farm, whilst their other son Troy works in the city. Sadly John and Linda are killed in a car crash. The farm is then left equally to both Matthew and Troy.
Troy has no interest in the farm and receives no benefits and asks Matthew to buy his shares however, Matthew is not willing, so Troy takes the matter to court to force his brother to buy his shares or liquidate the company. The proposal was rejected, and Matthew is forced to sell the farm to liquidate Troy’s shares. The family business is no longer.
To avoid unnecessary family disputes regarding farm inheritance, or the possible need to liquidate the family business talk to your Insurance House Life adviser to understand how best to plan for this type of event.
If you have existing life insurance, this can often be structured or repurposed to meet some or all of the needs mentioned above. It is complicated, so to get it right speak with an Insurance House Life specialist today on 1300 305 834 or email firstname.lastname@example.org
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product. The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Tim Hawker, Mike Townshend, Craig Matthews, Nicky Hamilton-Morris and Mark Oliver of Investment House Echuca T/As Insurance House Life ABN 90 105 663 401, are Authorised Representatives of Bombora Advice Pty Ltd ABN 40156 250 565, Australian Financial Services Licence 439065