Assuring the Liquidity of the Estate

Assuring the Liquidity of the Estate

Assuring the Liquidity of the Estate

Assuring the Liquidity of the Estate

Life insurance is the best available tool for assuring thatyour estate will be liquid. We have mentioned briefly theproblem of assets tied up in a business. How can the estate besettled? How can debts be paid? How can taxes be paid andhow can other problems be solved if there is no readilyavailable cash to do the job? Sometimes it may mean theforced sale at discount prices of a valuable asset whether thatasset is a home or other property not readily liquidated. Lifeinsurance may be used to meet this contingency and thevariety of uses is surprisingly large.

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Suppose for example that your estate consists largely of realestate worth a quarter of a million dollars. This is an asset ofyour gross estate, and it will be reflected in the estate taxes you are expected to pay. How is your executor going to paythe taxes if there is no cash? He must either sell part of theproperty or mortgage the property. If he chooses to sell, thetime may not be right to find a ready buyer at the right price.On a forced sale entered into because of pressure to raise themoney for taxes, he may have to sell the property for$150,000. A substantial capital loss may be incurred simply because the major asset of the estate was property which wasnot liquid.

Let us assume, however, that with this problem in mind,you took out a life insurance policy in the face amount of $50,000. Even if you were the owner of the policy, at yourdeath your estate would have the major portion of theseproceeds available to pay the estate tax. The valuable piece of property would be left intact. However, you could go further.You could put your beneficiaries in a position of being able tobuy the property from the estate, thereby rendering the estatecompletely liquid and creating additional assetsnot subjectto estate taxas well. In this instance, you might decide onlife insurance equal to the value of the property. If youappraise the property at $250,000 and you are able to obtaina policy on your life in that amount, you then proceed tocreate an irrevocable trust, and to assign the life insurance policy to the trust naming the trust as the owner and beneficiary of the policy with a specific directive to purchase theproperty from the estate, at your death, for $250,000. Whendeath occurs, $250,000 will be paid to the trust. The proceedsare not part of your estate, since you are not the owner. Thetrust than has $250,000 free and clear of estate taxes, which ituses to implement your instructions. It turns over the$250,000 to the estate, and the estate delivers to the trust titleto your real estate. You have now been able to render your estate liquid, and you have created an additional asset of$250,000 which is beyond the reach of estate taxes.

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