Introduction
You can make sure that your nonparticipating children receive equitable treatment after your death by include an equalization provision in your will or trust, assuming you have given your participating children shares of your closely held business during your lifetime. Your executor is instructed by an equalization provision to make sure that your non-participating children are treated equally when it comes to the division of your wealth, before any remaining estate assets are allocated. Only if you have enough assets to achieve equalization can you achieve this.
Example(s): Ted is a company owner. Bob, his son, is employed by him. Nellie-Mae, his daughter, doesn't. Ted wants to make sure that Bob and Nellie-Mae get an equal portion of his estate. Ted has handed Bob shares of the company worth $10,000 per year for the past six years, for a total of $60,000. He hasn't given Nellie-Mae any gifts like that. Bob will have inherited substantially more of Ted's money than Nellie-Mae if Nellie-Mae and Bob split the remaining half of Ted's assets after his death.
Example(s): Ted puts an equalization clause in his will directing his executor to equalize distributions to Nellie-Mae and Bob before distributing the remainder of the estate. Upon Ted's death, the estate holds net assets valued at $200,000. The executor makes the following calculation to determine what each child will receive:
|
Net Estate |
$200,000 |
|
Value of Lifetime Gifts to Bob |
+ 60,000 |
|
|
----------- |
|
Subtotal |
260,000 |
|
Divided by Number of Children (2) |
|
|
Total to Each Child |
130,000 |
|
Distribution to Nellie-Mae |
130,000 |
|
Distribution to Bob |
130,000 |
|
Less Amount Received during Lifetime |
- 60,000 |
|
---------- |
|
|
Total Remaining Distribution to Bob |
$ 70,000 |
Strengths
Generally Inexpensive and Easy to Do
Arranging to have an equalization clause inserted in a will or trust is fairly easy and inexpensive. It is imperative that your intentions are clear in writing and that your records properly reflect the value of gifts transferred during your lifetime. Your executor will need this information to make accurate calculations and avoid disagreements among your children.
Shifts Burden of Equalizing Distributions to Your Executor
By using an equalization clause, you can postpone deciding how to equalize distributions right now. It clarifies your objectives and leaves the details up to your executor, who will decide how to proceed depending on the situation at the time of your death.
May Allow You to Minimize Estate Taxes
You may be able to minimize prospective estate taxes and lower the value of your business in your estate by transferring shares of your company to your participating children while you are still alive. To ensure that children who choose not to participate are treated fairly, the equalization clause can be applied to the remaining portion of your estate.
Tradeoffs
Does Not Guarantee That Sufficient Funds Will Be Available
An equalization clause, by itself, does not guarantee that your estate will have sufficient funds to carry out your intentions. Your executor may have few assets left if you live a long time over your expected life expectancy and hospital or medical costs reduce the value of your estate. If so, even with the greatest of intentions, your non-participating children can end up receiving less than your participating children. By distributing estate distributions equally among participating children through a buy-sell agreement or life insurance, you can increase your certainty that funds will be accessible for them.
Does Not Solve Corporate Control Problems
Many equalization plans seek to make assets available to nonparticipating children while allowing the participating children to maintain control over the closely held business. Equalization clauses do not provide such a mechanism. If your estate contains only business assets, your nonparticipating children may end up owning a voting share of the company.
Tip: This worry may be allayed by using an equalization provision in conjunction with a buy-sell agreement or nonvoting stock arrangement. Alternatively, if there are enough assets, the equalization clause can instruct the executor as to which children should receive what.
Leaves Executor to Work out Details
By including an equalization clause, you delegate to your executor the task of determining any distribution plan elements that aren't covered by your will or trust. Situations may not have been the same on the day of your death as they were before.
You may not have been able to anticipate all possible variables. You will be leaving important decisions about your family and your family business to someone else.
How to Do It
Transfer Shares of Family Business to Participating Children during Your Lifetime
By lowering the value of the company held by your estate, giving shares of the family firm to your children while you are still living may help to reduce estate taxes. To take advantage of the annual gift tax deduction, transfers might be made in a methodical manner across several years.
Speak to an Attorney about Equalization Issues
It would be best to speak with a company planning and tax counsel about your scenario and the equalization difficulties. Your will or trust should include an equalization clause drafted by the attorney.
Keep Accurate Records
During your lifetime, your executor will need to know precisely what was handed to whom. Maintaining proper records can assist your executor in resolving heirs' conflicting claims and making accurate decisions.
Periodically Review the Plan
Periodically reviewing your plan is a good idea. Medical and hospital costs could reduce your estate, your retirement could result in a significant decrease in the value of your business assets, or you might decide to give your children additional presents. Make sure your estate has sufficient assets to implement your plan in a way that benefits your family and the family business. If not, you would have to look at alternative planning options.
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
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