I’ve talked about the many applications of Life Insurance before.
Both personally as well as for your business, Life Insurance can add a shield of protection when the most unexpected circumstances hit.
I’d like to outline a particular life insurance use case pertaining to one of my clients.
Let’s call the family the Dasani’s. The Dasani’s run a family business that was set up years ago by the family’s patriarch, Nitin Dasani.
Nitin is in his late 60s (at the time I am writing this), and sadly, lost his wife to terminal illness about ten years ago. Their two sons are involved in the family business, while their daughter chose a different line of work. All the siblings and their spouses live in the UAE, too.
The Dasani family business is currently valued at $100 million. The shares are divided as such: 34% in the father’s name, and 33% in each son’s name.
The mandate is for the business to be divided equally amongst both the brothers in the event of Nitin’s death.
The family also owns a large property portfolio. The brothers live on neighboring estates, each estate being worth $15 million. The two estates are in the brothers’ names.
In addition to their homes, the Dasani’s own property, equity, shares & stocks worth $100 million both within the UAE and outside.
Putting together the value of the family business, the property portfolio as well as all other assets and investments, Nitin would leave behind an estate worth $230 million to his three children.
Passing Down the Estate – The Challenge
Nitin wants to leave equal shares of his estate behind to all three children – and that’s where things get a little complicated.
If he wants to leave each sibling with equal value (approximately $77 million each), he would have to liquidate the business and sell the property in order to leave three equal inheritances behind. That’s neither in the best interest of the business, nor the investment portfolio.
The mandate for the business has always been clear – both the brothers would own equal shares and continue to run it together. But what about the $100 million worth of property & equities spread all over the world?
What about the two houses that are left to the two brothers, and no property like that left behind for the sister? How does that get distributed equally, or balanced against the 50% shares in the business that the brothers will own?
Another dilemma: Three key properties in the portfolio are in the UK. In the event that Nitin passes away, his children would be looking at a hefty tax bill upon inheriting the property. Going by the value of the property today, this sum is about £4 million as of now. This tax could go up by a significant amount over the next few years, owing to the appreciation of the values of the property.
So the next question was: What about the inheritance taxes that the properties carry?
You’ve probably guessed what this is leading up to. The solution, does in fact, lie in Life Insurance. Here’s how.
How Life Insurance Helped
Nitin’s well-structured Life Insurance policy helps with estate equalization, wealth preservation and handles the tax bill that his children would face when he passes away.
Here’s how the three siblings shares are planned:
Nitin divides all the bankable equities, stocks and shares evenly between the three children.
He then purchases life cover worth $20 million, and names his daughter the beneficiary of that policy.
To balance out the business shares that each brother holds, he leaves behind $45 million worth of property to his daughter, leaving each sibling with an equal $83 million. He also purchases additional life cover worth $6 million (or £4 million) to cover the inheritance tax that his daughter will have to pay when the property is written to her name.
Here’s a snapshot of the numbers:
The payout from the Life Insurance policy helps with:
- Estate Equalization: The siblings receive their inheritances as planned by Nitin – equal shares of the total estate’s value in this case.
- Wealth Preservation and Tax Shelter: The siblings receive an additional payout that covers the tax liabilities that come with inheriting the properties, without affecting the value of their inheritances.
- Larger inheritances for each sibling: The payout from the policy not only balanced out the assets but also raised the payout to each sibling from $77 million to $83 million each.
Because of the estate equalization offered by the Life Insurance payout, none of the family’s assets need to be dissolved, removing the possibility of any conflict and confusion, and further securing the family’s future.