How to Split an Unsplittable Inheritance

How to split an inheritance without splitting your family

We're all entertained by the stories of contested Wills, Disinherited Heirs and Trust Fund Children who have never worked for a living, amongst the celebrity rich and infamous. It seems you cannot even walk past a supermarket register today, without another Shock, Scandal, and Gold-digger headline prompting you to pick up one of the trashy glossy tabloid magazines.

Sure, creating division among family and friends makes for great Hollywood storylines, but for the rest of us, it's something we actively seek to avoid.

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Plan on leaving something meaningful to your kids when you pass away, not a nightmare

Have you ever wondered about how to leave an inheritance without leaving a problem? This very question stops many people from searching for (or even learning about) a solution.

Don't make that mistake with your family.

When it comes to leaving a meaningful inheritance for your children (or your grandchildren), you'd think when leaving equal shares of your estate to your children, there would be a simple mathematical solution.

The outdated mathematical calculation for dividing your estate amongst family beneficiaries:

1. Add up all your assets.
2. Then divide by the number of kids you have.
3. Use your Will to divide these assets equally amongst your kids (and hope for the best).

This simplistic approach rarely works with families and very rarely works with small business families.

A business solution that works for families too — Estate Equalisation

An Estate Equalisation Strategy allows large lumpy assets (businesses, farms, collectibles, family residential property, etc.) to be inherited by a selected beneficiary, while the other beneficiaries will receive funds from the life insurance proceeds.

Originally a business strategy from the world of Partnership Agreements and Business Succession Planning is the concept of equalising the value of an estate. This might be a useful solution for many families facing similar estate planning challenges.

• Simply said, estate equalisation is advanced planning using a life insurance policy, to provide any needed additional cash to balance a lumpy inheritance.

This is to ensure a fair distribution of the estate to all your beneficiaries.

Sensible thinking and estate planning for Families

Families can have similar problems to business owners when it comes to distributing lumpy assets in an inheritance.

For example:

• If you own a restored classic car or other collectibles of varying value and want to leave specific lumpy items to one child and not the others, you don't have to look far to realise this can create a significant emotional problem later.
• If you own a holiday house where all the children have enjoyed their formative years and one child wants to keep the inherited family holiday home and the other two want to sell it, you don't have to look far to see this creates significant problems and the risk of a 2-on-1 fight between siblings.

Insight: Think this won't happen to your family? In Australia, 86% of Wills, where the beneficiary includes a nominated charity, are successfully challenged by surviving children. The solution may be in equalising your estate to ensure all your beneficiaries are treated equally financially. Estate equalisation is another way of saying, ‘a fair go for all’.

Sensible thinking and estate planning for Business Owners

The problem for small business owners is often our business is one of our largest single assets and is, in practical terms, said to be ‘lumpy’. (The technical term is ‘ill-liquid asset’ but I've always found this statement invariably triggers the follow-up question, ‘and what does that mean?’ so let's go with ‘lumpy’).

Your wealth can be tied up in a single large lumpy asset that cannot always be easily divided between estate beneficiaries equally.

• This creates a problem of, how to distribute a single asset equally among beneficiaries, without destroying the very asset itself.
• If there are multiple assets, they are rarely of identical value, so a cash adjustment is usually required. A common example is when a family home is left to three adult children - invariably the asset is forced to be sold to split the value and family strife follows.

Fire sales at stressful times, and other bad ideas

The problem becomes a wicked problem when the inherited asset is only valuable when left in its large lumpy state: think of a family farm, a family investment property, a successful small engineering firm with future contracts.

• A fire sale of a lumpy asset rarely delivers the value wanted (and if there's CGT due on the sale of the asset – there is always an argument about who foots the bill) and you have a perfect recipe for a family storm.
• Without an available cash equivalent to the value of the lumpy asset for each beneficiary – how do you make the others feel they’re not being left out, while keeping the business asset in one piece?

Sensible thinking and estate planning for SMSF Trustees

There are rules requiring Self Managed Super Funds (SMSF) Trustees to consider the ‘financial benefits’ of the SMSF members and the ‘liquidity of the fund’. Estate equalisation planning has special relevance for SMSF members where their super fund may be investing in real estate assets that have yet to generate the required level of capital growth.

• A real estate asset is considered a lumpy asset, as it's not one you can usually sell overnight for the best price.
• Many real estate investments take time to achieve capital growth, so forcing a fire sale of a real estate asset, inside an SMSF, may not always be to the benefit of the members.

For this reason, SMSF Trustees have specific requirements to consider the liquidity of their SMSF so it's able to pay out equitably to the members if required.

Liquidity planning and insurance for your SMSF is a legal Trustee required consideration. This is where a Life Insurance policy is used to ensure there are sufficient ‘liquid funds’ available for distribution at the time of death, or in the event of permanent disability (TPD) claims by a fund member, without the need to sell illiquid assets (such as property). Sapience can help SMSF Trustees with their liquidity planning.

What’s the answer when you're faced with splitting an unsplittable inheritance?

Equalise the value of the estate so that everyone who has a valid claim is dealt with equally.

To prevent family arguments and reduce the risk of your Will being challenged, the sensible approach is to use an estate equalisation strategy.

• No good parent wants to knowingly leave a set of circumstances for their children and grandchildren, that will more likely than not, create an unequal environment to set up one of them for failure and the others for success.
• No good business owner wants to leave their family with a set of circumstances whereupon their unexpected death, their family is suddenly forced into business with the remaining business partner who is unable to buy out the departing owner's share of the business and its debts.

The real-life calculation for dividing your estate amongst family beneficiaries

1. Add up all your assets.
2. Then divide by the number of kids you have.
3. Then use a life insurance policy to provide any needed additional funds to ‘equalise the value of your estate,’ and ensure all beneficiaries are treated equally.

This way, the calculation for dividing your estate amongst beneficiaries is still simple, just a little fairer.

Speak with Sapience Financial about whether Estate Equalisation is a useful strategy for your situation.

Post Script Insight: There are a number of ways to ensure a life insurance payout is received by your intended beneficiaries. Learn about the different types of policy owner nominations. As each alternative may have different implications to consider, working with the specialist team at Sapience Financial can help you get this sorted.

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.