Estate Liquidity with Dion Johnson

Estate Liquidity

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

When a person dies, taxes and other costs must be paid in cash within a short period following the date of death. If arrangements haven’t been made to anticipate them, these expenses can severely deplete an estate intended to remain intact for the heirs.

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 the estate is short of cash, the executor may be forced to sell estate assets often at sacrifice prices resulting in a dramatic reduction in the wealth that was intended for the deceased’s heirs. 

Solving the Liquidity Problem

A comprehensive estate strategy prepared in advance not only provides for the disposition of an individual’s assets, but also makes certain that the executor will have the cash on hand to pay estate obligations at the precise time they become due. This will avoid the forced sale of estate assets, and the need to act promptly sometimes results in a loss in value. People often use life insurance to provide the estate with sufficient cash to satisfy the claims of creditors, to pay the taxes and other costs resulting from death, and to avoid forced liquidation of assets.

Some people choose to rely on marketable securities for their estate liquidity needs, but there are problems with this strategy. If they die before they’ve had a chance to build a sufficient portfolio or if the market is down when their death occurs the executor may not have enough cash to pay the estate’s liquidity needs. Life insurance, on the other hand, creates funds for estate liquidity at the precise time they’re needed, since the event creating the need creates the funds to satisfy the need.

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)

 

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Christine Matus

Christine Matus