10. What type of planning should there be for an illiquid estate?

If an estate is made up mostly of illiquid assets, how will the executor find the cash to pay the income and estate tax? To prevent the executor from having to rely on a quick sale, the purchase of life insurance may be a simple solution. Generally, if the policy is structured properly, the death benefit will not be subject to income taxes or be includible in the individual’s estate, and the cash may be available to pay taxes or to benefit heirs. Life insurance may be an income and estate tax–friendly method of wealth replacement for a family. For example, a first-to-die life insurance policy can be used to generate additional wealth at the first spouse’s death to ensure enough assets remain for the surviving spouse to maintain their lifestyle. Individuals may also choose to leave assets to charity to avoid estate taxes and fund a life insurance policy held outside of their estate that will provide wealth for heirs.

Planning point: There are many pitfalls to avoid when incorporating life insurance in an estate plan and many types of life insurance to consider. It is important to work with an adviser knowledgeable in this area to ensure the plan provides the estate and beneficiaries with the maximum benefit.