Five reasons why every wealth transfer strategy needs to consider estate equalization 

Issue 5, December 2023 I PCS Vision

More than 50% of wills are being contested in courts by disgruntled siblings – that’s the finding of research done by the University of Queensland in Australia.2  Now put that percentage in the global context of the “great wealth transfer” – the passing of USD73 trillion from Boomers to Millennials – and you can see the enormous potential for pitfalls.3

What is one way to minimize familial conflict and contest? Kei Yee Mok*, a Director at PCS by Mercer Limited explores this important topic. 

  1. What is estate equalization? 

    Estate equalization is an integral part of strategic wealth management. Most often used in estate and inheritance planning, the process is used to ensure the fair distribution of assets among heirs and beneficiaries. 

    The nuanced approach factors in asset value, debts, taxes, and specifications in the deceased's will. It helps to mitigate potential conflicts, fostering family harmony, and anticipates any imbalances among beneficiaries. Done well, estate equalization upholds testamentary intentions, and cultivates a legacy of fairness, transcending the complexities inherent in the transfer of substantial wealth across generations.

  2. Do high net worth (HNW) families often undertake estate equalization?

    Though not confined to affluent families, estate equalization predominantly finds application among HNW households, which are more likely to have complex financial scenarios, diverse assets, and numerous beneficiaries.

    In that context, estate equalization is increasingly used as a structured, equitable paradigm for wealth transfer. The process can be tailored to the distinctive objectives of HNW families while ensuring equity and mitigating conflicts.

  3. What are some reasons that high net worth (HNW) families might undertake estate equalization?

    Estate equalization is a strategic imperative for affluent families for various reasons:

    Equity: It helps to ensure each beneficiary receives a considered and impartial share, irrespective of their financial standing or contributions.

    Harmony: By ensuring equitable asset distribution, estate equalization fosters family harmony by minimizing the possible points of dispute and resentment and neutralizing perceived favoritism.

    Succession Planning: For families with private business stakes, estate equalization facilitates smooth ownership transitions, which helps to prevent business fragmentation, or forced sales due to inheritance conflicts.

    Tax Optimization: Estate equalization may help to minimize estate taxes by balancing asset distribution, potentially reducing the tax burden on both the estate and the beneficiaries.

    Philanthropy: Enables allocation of assets for charitable causes.

    Legacy Preservation: Estate equalization assists in safeguarding distinctive family values, traditions, circumstance, preferences, and impact across generations – solidifying a family's enduring legacy.

  4. What are the common ways (or structures used) of achieving estate equalization?

    Based on our observations, there are a number of ways to achieve estate equalization, including:

    Will or Trust Provisions: Clearly specified in a will or trust, these provisions determine how assets are equally divided among beneficiaries.

    Lifetime Gifts: HNW individuals might opt for lifetime gifts to heirs and beneficiaries, ensuring wealth balance – over time – through equal-value gifts or a planned asset distribution.

    Life Insurance: Utilizing life insurance as an estate equalization tool involves naming beneficiaries to receive proceeds equal to that of illiquid assets. Various policy types cater to personal and business succession needs.

    Family Limited Partnerships (FLPs) or Limited Liability Companies (LLCs): In certain jurisdictions, these structures may help facilitate equitable wealth transfer, and are particularly beneficial for families with business or complex investment assets.

    Please note that consulting with estate planning professionals, such as attorneys or financial advisors, is imperative in determining the most fitting and effective structures based on individual circumstances and goals.

  5. How can life insurance solutions help with estate equalization?

    Insurance solutions are advantageous in estate equalization in several ways:

    Matching Illiquid Assets: Policies provide immediate and pre-determined liquidity upon a insured's demise. Therefore, life insurance policies are particularly beneficial when the estate comprises of predominantly illiquid assets. Naming beneficiaries who do not inherit the illiquid assets ensures wealth equalization.

    Offsetting Estate Taxes: Policy payouts can be utilized to settle estate taxes, preventing inequities in wealth distribution due to tax obligations. 

    Flexibility: Insurance solutions offer flexibility in beneficiary designation, policy amounts, and payout options, allowing a tailored approach to estate equalization based on individualized family needs. 

    Privacy and Avoid Lengthy Probate: Depending on relevant inheritance law applicable to the life insured, life insurance proceeds pass directly to named beneficiaries outside probate, making them more time efficient, while enhancing confidentiality.

    It is important to seek individualized advice from insurance professionals and estate planning advisors to determine the most suitable insurance solutions. Factors like estate size, tax implications, relevant inheritance/probate laws and individual family dynamics need to be carefully considered.

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    About the author(s)
    Kei Yee Mok

    Kei Yee Mok has over 14 years of experience in serving HNW clients from private banks, family offices, and enterprise asset managers. She serve clients from China, Hong Kong, and Taiwan.

    Prior to joining PCS, Kei Yee was an associate director at Charles Monat Associates. Before that, she held leadership positions at FWD Life Insurance, and AXA Wealth Management.

    Kei Yee holds a bachelor’s degree in business studies and a master’s degree of Hotel & Tourism Management from The Hong Kong Polytechnic University.

    She is fluent in English, Mandarin, and Cantonese.

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