When a person dies, certain taxes and other costs must be paid in cash within a short period following the date of death. These taxes and costs deplete the amount left for heirs and may include these expenses:
- Federal and state death taxes
- Funeral and monument expenses
- Expenses of the decedent's last illness
- Debts of the decedent
Probate costs-executor's fees, attorney's fees, court costs, appraiser's fees, costs of insuring estate property, etc.
After these costs have been estimated, one must consider how they will be paid. A comprehensive estate plan not only provides for the disposition of an individual's assets, but also makes certain the executor will have the cash to pay estate obligations.
Life insurance or some other source of liquidity is often used to provide the estate with sufficient cash to satisfy the claims of creditors and to pay the taxes and other costs resulting from death. For individuals whose estates will be subject to the federal estate tax, life insurance can be arranged so that it is not included in the gross estate.
Using life insurance for estate liquidity offers several advantages:
- Proceeds are available immediately when needed.
- Proceeds are received free of federal income tax.
- The policy can be arranged to avoid probate and federal estate tax.
- Liquidation of estate assets, perhaps at sacrifice prices, can be avoided.
- Borrowing the cash at interest is also avoided, including paying the federal estate tax in installments.
- Policy death proceeds will nearly always equal more than premiums that were paid, allowing death costs to be funded for cents on the dollar.