Estate Tax Solutions
If you have a large estate, estate taxes may present a great financial challenge to your heirs. Heirs usually raise money to pay estate taxes in one of three ways:
- Selling Assets
If the estate includes liquid assets (bank accounts, publicly traded stocks, bonds), these can be used to pay the estate taxes; if the taxes are too high, real estate and other illiquid assets may have to be sold to pay them. Assets sold quickly usually sell below their fair market value. Generally, if they have to sell assets, your beneficiaries will end up receiving a smaller inheritance than you intend.
- Borrowing the Money
If they do not want to sell assets, heirs may have to take out loans to pay estate taxes; repaying these loans with interest will also result in a smaller total inheritance.
- Discounted Dollars
Life insurance benefits can be used to pay estate taxes. This is often described as using "discounted dollars" to pay the taxes, because the proceeds of a life insurance policy will likely be greater than the total premium outlay over the life of the policy. Policy ownership can also be arranged so the proceeds are not considered part of the insured's estate.
Life insurance can be a very cost-effective solution to the problem of estate taxes. Consult an insurance professional to discuss how life insurance can work with your estate plan.