Inexpensive Estate Cash Resolution

Many capital intensive business owners face serious income tax problems when they eventually pass on. Farms, resorts, manufacturers. Usually there is a provision to roll over the shares to a spouse, but that is just a temporary fix.

Eventually, the bill will come due. Then What?

Executors have just two choices

If there was no provision to deal with liquidity in the estate, the executors can sell assets the deceased owned or they can borrow. Neither is especially attractive. Borrowing requires security, thus tying up the estate, and the interest is not tax deductible. Selling usually costs. Everyone knows the estate must sell within a year to be able to offset captial gains at death and no one I know ever sees “Estate Sale” and expects to pay as much as fair value.

The executor is stuck unless the deceased anticipated a liquidity issue.

The deceased also had two choices

They could have owned liquid assets like T-bills. Possibly market investments, but no one knows what they will be worth on the day they’re needed. The income from T-Bills is tiny and fully taxable so, the investment is purely for the service of the executor.

The second choice is life insurance. The price is the premium. The advantage is the cash appears in time to solve the problems in the estate. You can work it out, but today most people would find, in the estate, the return on their premium investment is 4% or more after tax. You can’t get anything close to that with any investment having comparable predictability.

A variation

Life insurance pricing is based on life expectancy and other factors. The longer you can expect to live, the lower the premium. There is a way to be younger for this purpose and that is to insure two lives jointly and have the insurer pay on the second death. The joint probability of death for a couple is better than either taken by themselves. Since the money is not needed until the second death, why not take advantage?

This form of insurance provides the liquidity advantage at the lowest possible price.

There are other advantages possible, too.

  1. It is an attractive way to pass money to a charity
  2. It can equalize legacies
  3. It can offset the loss of capital if you own a joint life annuity.
  4. It could replace a bond fund and provide tax advantages
  5. If one partner has passed on while a party to a joint life contract, the other partner might remarry. In many cases there is a difficult problem at their eventual death. How to protect the new spouse financially without using up the estate for the children of the first marriage. The insurance provides an option.

Life insurance is a tool

Like other tools life insurance works best when it matches a clear problem.

Life insurance is not a cost. It is not even income taxes that are the problem; nor a second spouse either. The need for money in the estate is the problem. When looked at from the problem perspective, solutions become apparent. Hold cash, own life insurance, sell something, or borrow. There are just four possibilities.

When faced with several ways to solve a problem, it is wise to choose the one with the lowest cost to you and your heirs.

That will be life insurance. You could work it out.


I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

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