Estate planning and life insurance is very important. Here’s an important article with Dion Johnson of Axa Advisors FP, who we highly respect.
The Problem…
- When a person dies, taxes and other costs must be paid in cash within a short period following the date of death.
- These taxes and costs deplete the amount of an estate left for heirs.
- Typical costs include federal and state estate taxes; funeral expenses; expenses of the decedent’s last illness; the decedent’s outstanding debts; and probate costs such as
- Executor’s fees, attorney’s fees, court costs, appraiser’s fees, costs of insuring estate property, and more.
- The first step is to enumerate and estimate these costs. The next important step is to find the means to pay these costs.
The Response…
- Comprehensive estate preservation strategies should not only provide for the orderly disposition of an estate owner’s assets at his or her death, but also make certain the estate’s executor will have ready cash to pay estate obligations promptly.
- People often use life insurance to provide the estate with sufficient cash to satisfy the claims of creditors and to pay taxes and other costs resulting from the estate owner’s death.
- For individuals whose estates may be subject to the federal estate tax, the life insurance benefit can be arranged so that the proceeds won’t be included in the gross estate.
The Life Insurance Advantage…
- Life insurance proceeds are available immediately when needed.
- The event creating the need the estate owner’s death creates the funds to satisfy the need.
- The proceeds are usually received free of federal income tax.
- The ownership of the policy can be arranged to avoid probate and inclusion in the federal estate tax calculation.
- Payment of the proceeds avoids the need to liquidate other estate assets perhaps at sacrifice prices to create needed cash.
- The need to borrow at interest is also avoided, as is the need to pay the federal estate tax in installments (if this option is available).
- A life insurance policy’s death proceeds almost always surpass the premiums paid for the policy, resulting in estate costs being funded at a discount.
The Bottom Line…
A sound, regularly updated estate review serves multiple roles in arranging for the orderly disposition of estate assets at an owner’s death, while protecting the estate from needless taxation and shrinkage. Life insurance can be a key component that creates sufficient liquidity to pay estate obligations when the need arises without depleting the estate of assets intended for the heirs.
The Liquidity Problem
After a person dies, an estate may face expenses such as outstanding debts, funeral costs, administrative fees, and applicable taxes. Some of these obligations must be paid within specific deadlines, making it important to have sufficient funds available. Without proper planning, these expenses can reduce the assets passed on to beneficiaries. New Jersey families should also consider how changes to federal estate tax exemptions in 2026 may affect their estate planning decisions and potential tax obligations.
Expenses cropping up as a result of an estate owner’s death can add up to a long list:
- federal and state estate taxes
- funeral expenses
- unpaid medical expenses
- debts of the decedent
- executor’s fees
- attorney’s fees
- court costs
- appraiser’s fees
- costs of insuring and otherwise protecting estate property
If an estate does not have enough cash to cover outstanding debts, taxes, and administrative expenses, the executor may need to sell certain assets to meet these obligations. Selling property under financial pressure can result in lower prices and reduce the amount beneficiaries ultimately inherit. Families looking to preserve wealth across generations may consider bloodline trusts in New Jersey as part of a broader estate plan that addresses both asset protection and the availability of funds to cover estate expenses.
Solving the Liquidity Problem
A well-prepared estate plan does more than determine how assets will be distributed after death. It also helps ensure that sufficient funds are available to cover outstanding debts, taxes, and other estate expenses. Working with a Monmouth County estate planning attorney can help families develop strategies to meet these financial obligations without having to sell valuable assets under unfavorable conditions. Life insurance is one option that can provide funds to cover estate expenses and help preserve property for beneficiaries, depending on how the policy is structured and who receives the proceeds.
Some individuals rely on savings or investment portfolios to provide the cash needed to settle their estates. However, market fluctuations or insufficient savings at the time of death can leave an estate without enough readily available funds. Life insurance can provide a death benefit when it is needed, although the availability of those funds to the estate depends on the policy’s ownership and beneficiary arrangements. Families considering dynasty trusts in New Jersey may also benefit from coordinating long-term wealth preservation strategies with plans for covering immediate estate expenses.
Life Insurance Advantages
Life insurance offers other advantages to go along with its ability to create cash when needed. Among them:
- The proceeds usually are received free of federal income tax.
- For individuals whose estates could be subject to the federal estate tax, the life insurance benefit can be arranged so that it avoids inclusion in the gross estate.
- Liquidation of estate assets often at sacrifice prices typical of a forced sale can be avoided.
- Borrowing the cash is also avoided, including accompanying interest charges.
- The immediate creation of cash to pay settlement costs avoids the need to pay the federal estate tax in installments (with interest).
- A life insurance policy usually returns substantially more in death proceeds than was paid in premiums, allowing estate costs to be funded at a discount.
Other Considerations
While life insurance provides many benefits for estate planning, individuals should also be aware of these other considerations before making any estate planning decisions:
- Requires financial and medical underwriting.
- Requires funding via premium payments to maintain the policy.
- Most life insurance only covers individuals for a limited period of time. Many policies last for only one year or for five-year increments up to 30 years.
- Old age or poor health can turn the flexibility of premiums into a disadvantage, because cost of insurance are known to increase substantially in cases when death becomes more likely.
- Those in poor health may not qualify for coverage or unlikely to get life insurance for reasonable premiums.
Conclusion
A sound, regularly updated estate review serves multiple roles in arranging for the orderly disposition of estate assets at an owner’s death, while protecting the estate from needless taxation and shrinkage. Life insurance can be a key component that creates sufficient liquidity to pay estate obligations when the need arises without depleting the estate of assets intended for the heirs.
This blog post is based on a current federal income and estate tax law and interpretations. It is general in nature, and should not be construed as legal or tax advice, for which you should consult qualified legal and/or tax professionals.
Dion Johnson offers securities through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Annuity and insurance products offered through AXA Network, LLC. AGE-115486 (6/16)(Exp. 6/18)
