The classic family business problem: one child works in the business, the others do not, and the business is most of the estate. Splitting the company equally gives non-active children a stake in something they cannot control and the active child partners they did not choose. A common fix is to leave the business to the active child and use life insurance, often owned by a trust, to give the other children equal value in cash. Insurance can also supply liquidity for estate costs so nobody is forced to sell.
We are licensed insurance brokers, not CPAs or attorneys. Treat the tax and legal points on this page as general education, and confirm them with your own CPA or attorney before acting.
On this page
Why equal is not always fair
Most parents want to treat their children equally. In a family business, equal shares often produce the opposite of what they intended:
- The child who runs the business does the work while siblings share in the profits.
- Non-active siblings want distributions; the active child wants to reinvest.
- Disagreements over pay, spending and a future sale can split the family.
- Non-active children own a minority interest that is hard to sell and often valued at a discount.
Fair often means equal value, delivered in different forms: the business to the child who will run it, and cash or other assets to the others.
Equalizing with life insurance
A widowed owner has a manufacturing business worth $4,000,000 and $1,000,000 of other assets. Her daughter runs the business; her two sons work elsewhere. She leaves the business to her daughter and buys a $4,000,000 policy, owned by an irrevocable trust, for the sons. With the other assets split appropriately, each child receives roughly equal value, and the daughter owns 100% of the company she runs.
The details matter: who owns the policy (a trust keeps it outside the taxable estate if that is a concern), whether it is a single-life or survivorship policy for a married couple, and how values are updated as the business grows. Equalization plans should be revisited every few years, because the business value moves and the insurance amount does not.
Alternatives to inheriting it all
- Sell to the active child during life, with a note, and use the payments to fund the parents' retirement and gifts to other children.
- Gift shares over time using annual exclusions ($19,000 per recipient in 2026) or lifetime exemption.
- A buy-sell between parent and active child, funded with life insurance the child owns on the parent, so the estate receives cash for the shares and can divide that cash among all the children.
Estate tax and liquidity
With a $15 million federal exemption per person in 2026 (and portability for a surviving spouse), many family businesses will not owe federal estate tax. Larger ones still can, at a 40% top rate, and the tax is due nine months after death. Two tools help:
- Life insurance sized to the projected tax, typically owned by an irrevocable trust; see ILITs explained.
- Section 6166, which lets an estate defer the tax attributable to a closely held business that is more than 35% of the adjusted gross estate, paying interest only for up to five years and then the tax in up to ten annual installments. It helps, but the estate still owes the money, and the deferral comes with conditions.
Estates that are almost all business and real estate are the ones most likely to be forced into a sale without planning, even when no estate tax is due, because of debts, estate costs and the need to pay non-active heirs.
Talk about it while you can
The hardest part of succession is the family conversation, not the paperwork. Many owners find it easier with their attorney, CPA and insurance advisor in the room and a draft plan on the table. Run the numbers first with the buy-sell funding calculator and see where insurance fits in our estate planning guide.
Frequently asked questions
How do I leave a business to one child and be fair to the others?
Leave the business to the child who runs it and give the others equal value in other assets. Life insurance, often owned by an irrevocable trust, is a common way to create that equal value without forcing a sale.
Should a survivorship policy be used for equalization?
For married couples whose plan leaves everything to the surviving spouse first, a survivorship (second-to-die) policy matches the timing, since the children inherit at the second death. It is also usually cheaper than two single-life policies.
What is Section 6166?
A tax code provision that lets an estate pay the estate tax on a qualifying closely held business in installments: interest only for up to five years, then up to ten annual payments of tax, if the business is more than 35% of the adjusted gross estate and the executor makes a timely election.
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Written by Erik Moran
Erik co-owns Moran Insurance Group with Amanda Moran and handles the agency's life insurance cases, from key person and buy-sell coverage to trust-owned policies. He works alongside clients' CPAs and attorneys, who make the tax and legal calls. More about Erik.
Sources
Moran Insurance Group is a licensed insurance agency. Our brokers are not CPAs, attorneys or tax advisors, and nothing on this page is tax, legal or investment advice. Tax figures and rules reflect our understanding as of October 2026 and can change. Coverage is subject to carrier underwriting and state availability. Confirm anything tax or legal with a licensed CPA or attorney before you act on it.