The Price of Having Cash

There is a cost to get cash and people make a mistake when they only see the expense they must pay to do so.

Tax problems are a common enough thing.  There are two kinds.

  1. They want money you think you should not owe.
  2. You legitimately owe money but do not have the cash to pay.

The first will usually resolve itself with the help of professional advisors familiar with your situation and the law.  In many cases, it is just an inconvenience.

The second case appears regularly.  The most common example is that of someone who dies and their death triggers huge tax bills on the property deemed to be disposed of on death.  Capital gains on rental properties, shares of a business, a family cottage, a farm, retirement plans and accrued capital gains in an investment portfolio.

The method of dealing with this problem is two-fold.

The first part is to use professional advisors to structure holdings so that the tax owing in the event of death is minimized or deferred.  There are techniques for that and they range from freezes, to holding companies, to family trusts, and to some forms of rollover.  The goal is to find the irreducible minimum cost to be incurred by the estate.

The second part is less commonly investigated.  The required insight is that no one has a tax problem if they can write a check to clear the amount owing. 

Even the irreducible minimum can be a significant amount and so the method chosen to create the deposit that clears the check to the government is an important decision.

There are four methods to acquire cash in an estate.  Each has a cost and the cost can be analyzed.  Two of them rely on the estate trustees for completion and two are preplanned by the deceased.

The estate trustee controls borrow and sell.  These tend to be unattractive but as a last resort are usually doable.

Borrowing requires security that will delay final distribution and any interest paid is not tax deductible.  There will be trustee and legal fees in the extended time.

Selling requires two things.  A buyer willing to pay fair value and costs of disposition.  The costs of disposition are more certain.  Estate sale typically means bargain and the trustees may be faced with a difficult choice.  Selling an estate asset for less than the deemed value at death results in a carry back of the loss to the deceased taxpayer final return.  The deceased will owe less tax.  However, if the sale closes twelve months and a week after death, there is no carry back and the estate will have a capital loss that may have no value.  As trustees approach the end of the “Executor year” they begin anxious venders.  Not good for value.

If a trustee needs cash to clear loans or to avoid the executor year problem, they adopt the ancient rule of commerce.  “When you need money you sell what you can not what you want.”  Keep the best; sell the rest, is turned on its head.  Sell the best; keep the rest is a poor tactic.

Alternatively, the deceased could have supplied cash to the trustee by holding cash assets or by owning life insurance.

Cash assets tend to earn little and the little they earn is highly taxable.  It is a common choice because it is easy to implement.  It adds no value to the estate other than convenience.

Life insurance can supply cash to the estate in much the same way, but it does so more efficiently.  It is more tax efficient and it pools the life expectation of large numbers of people.  For many people the capital needed to fund the premiums is much lower than the amount held as cash assets.  Life insurance frees assets for other purposes.  Another important advantage is that life insurance would create the liquidity immediately if someone died too soon.

When solving this kind of tax problem, be sure you have solved both parts of the problem.  Overlooking the cost to acquire liquidity is easy to miss and it is a very costly mistake.


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

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