Estate taxes are an important part of estate planning. On the one hand, there is the task of doing everything possible to minimize estate taxes. Various tools and techniques are used for this purpose. On the other hand, there is the task of proving the funds to pay for any estate taxes that are unavoidable. People sometimes overlook this latter task.
The danger of failing to set aside money to pay for estate taxes is that heirs may be forced to sell illiquid assets that they don’t want to sell, such as real estate, businesses, investments, or valuable personal property. One way to address this issue is to utilize survivorship insurance, sometimes called second-to-die insurance.
Survivorship insurance policies cover the lives of two people and pay benefits only when the second person dies. This kind of insurance can allow wealthy couples to cover estate taxes on the death of a surviving spouse who avoided the tax because of the unlimited marital deduction, which allow assets to pass tax-free to a widow or widower. Business partners, dual-income parents and couples providing lifelong care for a special-needs child can achieve the same benefit.
More and more families have been purchasing survivorship policies in light of the oncoming changes to the estate tax exemption amount, which is set to go from $5 million to $1 million in 2013. This change means more estates will be paying federal estate taxes.
Survivorship policies have other uses as well, but their use in estate planning can be invaluable for avoiding the undesirable situation of having to sell inherited assets that one wants to hang on to.
Source: Fox Business, “Survivorship Life Insurance: It’s Heir Care,” Jay MacDonald, September 10, 2012.