If not, give this some thought!
Estate taxes come due nine months after the death of the sole surviving spouse or individual whose net worth comprises the estate. While nine months may seem like a long enough time to wrap up an estate and gather the money to pay the taxes, I suspect that would only be the opinion of someone who has never had to deal with the task before.
Keep in mind that in most cases a taxable estate is worth over $7 million, the amount reached after both spouses in a marriage use their full $3.5 million dollar estate tax exemption. Generally speaking high net worth individuals don’t have their money sitting in a checking account, but have it tied up in investments and property.
I worked with a couple last year who had a net worth in the $20 million range and admitted that they really only had about $1 million in truly liquid assets. Most of their worth was tied up in real estate development partnerships and other types of real estate contracts. Most of those contracts had no clear method spelled out for disposition on the death of a partner. As we discussed, in the event of their death, in order to meet the 9 month deadline for federal estate taxes the family would likely have to make some fire sale deals with at least some of the partnerships in order to raise the cash.
While this couple had an unusually large percentage of their net worth in a non liquid position, it is not unusual that the amount of taxes due is larger than the amount of cash on hand. This is precisely why life insurance is and has been used as a way to cover this expense. Generally the amount of the death benefit, which if planned properly will be very close to the amount of taxes due, can be in the hands of the executor of the estate within 2-4 weeks.
Timeliness is one of the primary reasons for covering estate taxes with life insurance. Another good reason is cost. In almost all cases the cost of life insurance will be far less than the cost of the taxes due, so with careful planning you get to pay the government in full for pennies on the dollar. Don’t we all wish that every April 15 we could just send the IRS our payment in full, but through some kind of insurance plan it would only cost a fraction of what we really owed?
There is no time like right now to consider replacing an old survivorship or 2nd to die policy, or if you don’t already have one in place, getting the job done. Unlike the old whole life and traditional universal life policies that use tons of extra premium to build unnecessary cash value, today a permanent estate protection plan can be put in place for far less with an external guarantee no lapse universal life policy. This is a product that is currently at an all time low price and all indications is that it has bottomed out. Now is the time to buy and lock in rates that will likely never be seen again.
Bottom line. Estates are what we work a lifetime to build for our family and poor planning can end up running it through a shredder upon our death. Don’t leave it to the government and don’t leave it vulnerable to a liquidation fire sale that could render it useless.