While it certainly isn’t our duty to work our tails off all of our adult lives just so we can leave the legacy of an estate to our heirs, I saw a study a few years ago that indicated that it really was the goal, a desire, of the boomer generation and our parent’s generation.

One thing is almost a certainty. None of us work all of our lives so that we can build an estate in order to turn it over to the government. The way the estate tax system is set up, even though the estate tax exemptions are at least for now reasonably generous, because estate taxes are due and payable 9 months after death many estates lose all or at least part of the exempted amount due to the need to rapidly liquidate assets. 9 months may at first seem like plenty of time, but just appraising a large estate can take months.

Think about it. Estate tax exemptions are $3.5 million for an individual or $7 million for a couple. Say a couple has an $12 million net worth comprised mostly of real estate holdings. Upon the death of the second spouse there is a 45% tax due on $5 million above the exemption. So, the executor of the estate has to come up with $2.25 million to send to the government within 9 months.

In a market like today where none of the property is worth anything close to what it was a year ago and sales are slow, the executor will likely end up having to dump property at fire sale prices just to raise cash. If the property was highly leveraged, even that may not help meet the deadline. So, even though the taxes are only about 1/6 of the estate value in this case, it is not a stretch to see how 1/2 or more of the estate could potentially be liquidated just to pay the tax bill. There are plenty of examples out there where estates are wiped out just to pay the “death tax”.

I know I’ve been beating up on this issue a bit lately, but with Congress poised to suck the tax marrow out of everyone who has made something of themselves, life insurance is the only reasonable answer to keep them out of the legacy you’ve built. 2nd to die or survivorship life insurance policies coupled with an irrevocable life insurance trust are the vehicle that can, for pennies compared to an estate’s net worth, stand ready to pay that tax bill and do it in a timely fashion.

Bottom line. Estate taxes are a reality and it doesn’t appear they will go away or even become more favorable in the near future. Even if the doubtful happens and estate taxes are repealed at some point, you at least have the option then of dropping the insurance or keeping it and increasing the size of the estate. If you decide to go it without insurance, make sure you work closely with an estate planner to keep the proper amount of assets in a liquid position.