Some Problems Are Really Two

I am frequently drawn into the discussion of taxes and other obligations due at death.  Large numbers typically.  It is interesting to see how people attack this problem without understanding its full dimension.

Problems like this are actually two problems rolled together.  Some recognitions are needed:

  1. Absent heroic means, the problem is inevitable, but an important question arises, “Is it really a problem?”
  2. Harvey MacKay in “Swim With The Sharks” postulated Law 62.  “If you have a problem that you can solve by writing a check, you do not have a problem, you have an expense.”
  3. Writing a check is not a problem if you can make the deposit that will clear it.

To be fully solved, problems of this type must include ways to cost efficiently reduce the expense and ways to cost efficiently acquire the deposit.

Making the number smaller usually entails enlisting the aide of helpers like accountants and lawyers.  Most people face this problem only once so tend not to learn from experience.  Professionals have the advantage of seeing other people’s experience.  Use them to address two aspects of the expense question.

  1. Can we make the number smaller?
  2. Can we keep it from growing?

Making the number small is often not worth the cost to do it.  Zero is a poor choice.  Seek some irreducible minimum and let it go.

Keeping that number from growing is usually possible.  A freeze is common.  Other cases involve trusts and sprinkling income and capital gains.  All involve some method from the tax tactic set  {change income type, deduct, divide, defer}

Minimizing is useful but only part of the answer.  Getting the money to clear the check has a price. You can analyze it too.

There are exactly four ways to get cash into an estate.  Two controlled by the client and two others controlled by the executor by default.

Executors control:

  1. Borrow using estate assets as security, and
  2. Sell something.

Each has undesirable characteristics.  Borrowing ties up the estate and will usually result in selling something eventually.  Selling requires a buyer and they typically do not want to pay full price.  Estate sale equals bargain.  Executors have a year to carry out the sale or there may be adverse tax consequences.

Clients force these choices on their executors when they try to grow value with illiquid or hard to sell assets.  Growth assets make the liability in the estate bigger and thus the arrange deposit problem more difficult.

Assuming they have helped the executors avoid the borrow/sell problem, the client controls two solutions.

They can own:

  1. Predictable value liquid assets, or
  2. Life insurance.

Because of its tax advantages and its ability to fulfill an unexpected near term need, life insurance is by far the cheaper of these two.

In most cases, life insurance is cheaper than assets that grow at equity rates of return and unless the heirs do not care when the estate winds up, it is cheaper than borrowing, too.

Do not overlook easy to arrange, efficient, and obvious solutions.  Your executors and heirs will thank you.


Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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