How Will I Pay Estate
Taxes?
Estate taxes. It’s not
enough to simply know they exist, and to know strategies to minimize them. When
it comes down to it, you need to plan how you and your family will eventually
pay them.
The Estate Tax Dilemma
Estate taxes are generally
due nine months after the date of death. And they are due in cash. In addition
to estate taxes, there may be final expenses, probate costs, administrative
fees, and a variety of other costs. How can you be sure the money will be there
when it’s needed?
Estate Tax Options
There are four main
sources of funds to pay estate taxes. First, your current savings and
investments. You or your survivors can use savings and investments to cover the
costs of estate taxes, probate fees, and other expenses. This is often a sound
alternative. However, sometimes savings and investments may not be sufficient.
And if those savings were earmarked for other financial goals, you may need to
rethink how you will achieve those goals.
Another option would be to
borrow the money. Unfortunately, with this option you not only have to pay the
estate taxes, but you or your survivors will be forced to pay interest on the
amount borrowed to pay estate taxes. Remember to consider how your family’s
credit standing will be affected by a death in the family.
The third option involves
liquidation. If estate taxes are larger than the cash available to pay them, you
may have to sell valuable assets such as the family home, the family business,
or other assets. Hopefully, they will sell for what they’re worth. In many
cases, however, they don’t.
The fourth option — one
that is often a prudent way to pay estate taxes — is life insurance.
What Can Life Insurance
Provide?
Life insurance can provide
a timely death benefit, in cash, that can be used to pay estate taxes and other
costs. And it will be paid directly to the beneficiary of the policy, without
being subject to the time and expense of probate.
Granted, life insurance
does require premium payments. However, if appropriate to your situation, life
insurance premiums can be looked at as a systematic way of funding future estate
taxes. You get guaranteed liquidity and a death benefit that is generally free
from federal income taxes. Indeed, the financial protection provided by life
insurance can be invaluable to those who have the burden of paying estate taxes
— your loved ones.
The cost and availability
of life insurance depend on factors such as age, health, and the type and amount
of insurance. Keep in mind, however, that there are special tax rules that apply
and you should seek professional advice before implementing this strategy.
Coping with estate taxes
may be a difficult proposition for you or your survivors. When it comes to
paying them, consider life insurance. It may be a strategy worth considering,
and overlooking it could be costly.
© 2003 Emerald Publications
