Life insurance has long played an important role in resolving the "equal versus equitable" conundrum. The ideal solution for clients who want to treat all children equally is to leave the business with those who will actively run it and assets of equal value to the inactive siblings. At first glance, this solution seems as easy as it is apparent, but many clients find that their business is by far their largest (if not only) asset, making it practically impossible to "equalize" assets with what's left.
Here is where life insurance comes in. Life insurance provides a way to equalize the amount of assets distributed to the active and inactive children. An irrevocable life insurance trust is especially appropriate here, since the assets are intended only for the benefit of heirs and serve no purpose residing in the founder's estate. With an ILIT, the trustee can be directed to finesse the amount of proceeds distributed to each child, truly equalizing the inheritance based on the business's valuation at the time of death. (On the other hand, simply making the inactive children the policies' beneficiaries can mean they might get more or less than the appropriate equalizing amount.)
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