Gifting StrategiesEstate LiquidityAn irrevocable life insurance trust can also be used to provide estate liquidity. Liquidity demands can exist to pay federal and state estate/inheritance taxes, federal and state income taxes, probate and administrative costs, debts, and cash bequests.
Liquidity can be a serious problem for estates that are mainly comprised of relatively illiquid or unmarketable assets, such as closely held business interests, undeveloped real estate, or certain tax-sheltered investments. Meeting the claims and taxes levied against an estate generally is the responsibility of the executor or administrator, who does this using primarily the probate assets. These are the only assets that are directly available to the executor.
A second-to-die policy is most often used when there is a substantial estate. Use of the unlimited marital deduction permits deferral of all or most federal estate taxes until the surviving spouse's death. Premiums are generally lower than for equivalent coverage in two separate policies. The second-to-die policy can be held by an irrevocable life insurance trust to remove the value of the policy from you or your spouse's gross estate.
Although it is possible to have a zero estate tax liability at the first spouse’s death by fully utilizing the marital deduction, an estate tax liability may result for large estates at the death of the surviving spouse.
Where other liquidity may not be available, insurance on one or both of the spouses may be the best answer. To keep the insurance from being included in the insured’s estate, consider having an irrevocable life insurance trust own the insurance policy. The trust can provide tax-free liquidity to the insured’s estate by lending to or purchasing assets from the estate.
A second-to-die policy provides liquidity when it is most needed. The proceeds can be used to fund the payment of estate taxes, leaving more of your estate available to your heirs.
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