A common dilemma for business families is this: one child works in the family business and should inherit it, while the other children do not. Giving the business to one child and nothing comparable to the others invites resentment and, in Australia, possible family provision claims. Selling the business to divide the proceeds may destroy what the founder built. Life insurance is often part of the answer.
Equalising inheritances
A policy on the founder’s life can provide cash for the children who do not inherit the business, so that each child receives a fair share without the business being sold or burdened with debt. The amount, the ownership of the policy and the beneficiaries need to be planned together with the will.
Who receives the money matters
- Policies owned personally generally pay to the estate, where the proceeds are dealt with under the will and may be exposed to claims and creditors.
- Policies owned by another person or entity pay to the owner. This can keep proceeds outside the estate, but the owner must then pass them on as intended.
- Insurance inside superannuation follows the superannuation death benefit rules, including binding nominations and different tax treatment for dependants and non-dependants. See superannuation nominations and estate planning.
- Policies held in trust, including a testamentary trust created by the will, can protect proceeds for young or vulnerable beneficiaries.
Protecting the business itself
Business families also use insurance to protect the company from the loss of a key person, and to fund buy-sell arrangements under which surviving owners buy a deceased owner’s shares at an agreed value. Without such an agreement, the deceased’s shares may pass to family members who have no role in the business, which can lead to deadlock. See family company succession after the founder’s death.
Cross-border points
Where the founder or beneficiaries live outside Australia, the policy’s governing law, the tax treatment of proceeds in each country and how payment will be made should be checked. A policy issued in Hong Kong or Singapore may interact differently with an Australian will.
How we assist
We work with families and their insurance advisers so that wills, trust deeds, company constitutions and buy-sell agreements match the insurance arrangements, and that proceeds reach the intended people. We do not provide insurance or financial product advice; that should come from a licensed adviser. Justin Chua is a Nationally Accredited Mediator and an Affiliate member of STEP, the worldwide professional body for trust and estate practitioners.
Frequently asked questions
How can life insurance make an inheritance fairer?
If one child inherits the family business, a policy can provide cash for the other children so that each receives a fair share without the business being sold.
Does life insurance form part of the estate?
It depends on who owns the policy and who is nominated. A personally owned policy usually pays to the estate; a policy owned by someone else or held through superannuation may not.
What is a buy-sell agreement?
An agreement between business owners that, on the death or disability of one owner, the others will buy that owner’s interest at an agreed value, often funded by insurance.
Do insurance arrangements need to match the will?
Yes. The will, trust deeds, company documents and insurance ownership and nominations should be reviewed together so they produce the intended result.
Chua Tan Associates advises families, executors, trustees and their professional advisers on estate planning, estate administration and estate disputes, in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice. Victorian law unless stated otherwise.
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