Death and Estate Taxes


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Some life insurance companies preach the “theory of diminishing needs” for life insurance. It says that we will become self-insured by paying down debt, accumulating investment assets and reducing expenses.

I once believed this theory. However, I have experienced otherwise. Life happens. As a result, needs for life insurance coverage often continue longer than we originally expect. Consequently, term life insurance coverage becomes very expensive and eventually expires years before our expected death. The coverage often ends before it is needed the most – at death. Estate taxes, executor fees, legal fees, and other final expenses must be paid. The biggest expense by far is taxes. Successful investors have built their wealth through hard work, sacrifice, and tax-efficient investments. These investments may be tax-efficient, but they are not usually tax-free. Most of them simply defer the tax. That tax becomes due upon death or the second death in a marital relationship. Consequently, the estate pays the tax man by selling assets at fire-sale prices. Lack of liquidity causes most estate problems, leading to estate shrinkage at huge cost – often one-third to a half of the value of the estate! Estate liquidity is a huge problem with businesses, rental real estate, vacation properties, and large investment portfolios.

Estate Tax Payment Options:

You can plan ahead for these estate expenses through a proper estate plan, including a projection of estate income taxes. You could prepare for the future tax burden in a number of ways:
  1. Set aside a large amount of cash reserved for the expected income taxes. The problem with this option is that the cash is not very tax-efficient. You are also losing huge opportunities, as there are more effective ways of investing the cash.
  2. Inform your heirs that they may need to tax out loans against the value of the estate assets in order to pay the taxes. The problem is whether the heirs will qualify for the loan.
  3. Take out enough permanent life insurance like whole life or universal life. Although the premiums will cost money, the benefit of the life insurance is crystal clear. Life insurance is the only option that delivers tax-free cash exactly at the time it is needed – at death.
A solid estate plan is essential. You need to anticipate and project out the severity of the future tax liability. With proper planning, your heirs can take care of this expense efficiently. With no plan, you will endanger your legacy. Time for an Estate Tax Planning Conversation?

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