Paying The Bills In An Estate

Many estates have significant  liabilities at the second death of a couple. Estate costs and income taxes can easily approach 25% of the estate. If you own a business or real estate it can be much more.

A fact of life (or death in this case)

There is not such thing as a tax problem. All their is, is an inability to deposit a cheque large enough to clear the tax bill and the other costs of the estate. For people with many illiquid assets, liquidity will become a crisis. The executors could borrow and tie up the estate for years, or they could sell complicated assets at a discount. Who ever heard of paying full price at an estate sale?

Wise people who accumulate such assets while living abide by a simple rule. Keep the best and sell the rest.

Executors face time pressure and adopt a slightly different version. Not because they want to do so, but because they must.

Sell the best and keep the rest.

Poorly prepared estates often have liquidity problems

While your executors will choose between selling assets at a discount or borrowing to clear the obligations, you had two choices too.

  1. Own liquid assets, like t-bills or a money market fund. You don’t know when you will need the money and so more lucrative investments are not easily used for this purpose. The market could be down when you need the money.
  2. Own appropriate life insurance. The most common format to pay for estate liabilities is joint life second to die. The idea being that most of the costs appear only at the second death of a couple.
  3. It is an economical way to be sure there is enough cash to meet obligations and help equalize the asset distribution to the heirs.

It works like this

The insurer does not pay until the second person covered dies. The advantage to the client is the “joint life” mortality expectation is better than a single life. Most companies use what they call an equivalent single age. It is the male age where the expectation of life expectancy is the same as it is for the husband and wife being covered. For a male aged 62 and a female aged 60 the Equivalent single age is 51. So the policy will be priced for that age.

Suppose they need $2,000,000 to pay the bills. One choice would be level cost coverage inside a universal life policy. It’s the easiest way to see the advantage but is not always the best choice. Other plans sometimes work better. The annual premium would be around $30,000.  That’s about45% less than husband would pay for a single life policy and and about a third less than wife would pay for single life coverage.

What would you invest in that is liquid and has a guaranteed value of $2,000,000 on any day the second of you dies in the future. That could be 35 years from now or next week. Investments like that are not so common.

Anyone with an estate that has liquidity problems  should be able to explain why they have not chosen this method of solving the problem. Executors will be pleased and heirs will settle the estate much more quickly.

The most common reason I hear is they could make far more doing something else. If true, the tax liability just got much larger. You don’t make your estate easier for heirs and executors by by adding costs and complexity.

The bits to take away

There are only four ways to get cash,  into your estate. 1) Own the cash before  you die and earn very little because of the kind of investments that satisfy the guaranteed need part of the investment. 2) Demand that your executors sell assets. 3) Demand that the executor borrow and tie up the estate. or 4) Own appropriate life insurance. You could work it out, there is a significant cost benefit is to own the insurance.

Never choose complicated methods for problems when simple tools exist to solve the problem.

Help me please. If you have found this useful, please subscribe and forward it to others.

I build strategy and fact-based estate and income plans. The plans identify alternate ways and alternate timing to achieve both spending and estate distribution goals. In the past I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning, have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email to

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