Sources for Estate Liquidity Flashcards
What are the major causes of liquidity for estate planning purposes?
- Administrative expenses
- Estate, gift, income, and GST taxes
- Debt
- Medical expenses
- Financial needs during transition period
- Funeral expenses
When are estate taxes due?
Within 9 months after death
How can life insurance be useful for estate purposes and what is a good planning strategy for life insurance?
- When liquid asset such as bank accounts and/or investments are nonexistent or low:
- It could be beneficial to have life insurance
- To make sure proceeds are NOT included in the decendent’s gross estate:
- Useful to put it in a Irevocable Life insurance trust
What admin costs are there?
- Attorney fees
- Accountant fees for tax returns
- Administrator/executor fees
- Appraisal costs for things such as real estate, collectibles, and business interests
Financial needs for family members during transition period
- Important to have liquidty for them to be able pay basic living expenses
- Especially imporatant for when there is a SUDDEN death to a breadwinner in a young family
Funeral expenses
- Funerals are rising faster than inflation costs
- Cremation is usually cheaper
Medical expenses
- These need to be planned for, preferably ahead of time
- Need liquiidy to pay of these expenses, especially if the decedant was terminally ill and incurred a lot costs during the last few months of life
Taxes
- Need liquiidty for taxes such as estate, income tax, GST, and gift tax
- These are all generally due within 9 months of death
- Also need liquidiyt for income generated by estate’s assets and need to be paid annually
Potential sources of liquidy from an estate for paying off expenses from estate distribution and estate administration
- Savings and investments
- Loans for tax payments and expenses
- Life Insurance
- Distribution of assets instead of cash payments
- Closely held business interests
- Sale of assets or business interest
- Tax-advantaged accounts
How can redemptions of shares help?
- If in a closely held business or family C-corporation:
- Partial or full redemption of the decedant’s shares at death could meet a substantial portion of the income needed by the dependent family members
- Partial redemption of corporate stock is treated as DIVIDEND distribution for tax purposes
How can a buy/sell agreement help?
- Because it transfers the decedant’s shares to shareholders for cash, which provides liquiidyt needed for estate and AVOIDS probate
- Also provides a GUARANTEED market for the shares and the reamining shareholders and the business itsself gets greater control and ownership.
How can distributing assets from estate instead of paying cash help?
- Since these are not as liquid, you could distribute assets instead of cash to pay some creditors off (if they allow it)
- Although, this is NOT ALLOWED for paying any sort of taxes
Remember ILIT for life insurance
- Because if the decedant is the owner AND the insured, it will be included in their estate (the proceeds)
How does an ILIT work?
- Make sure to put it in there MORE THAN 3 years PRIOR to death
- ILITs are funded by the grantor either by:
- Transferring an existing policy on his/her life into the trust OR
- Transfers cash for the trustee to purchase a new policy on the grantor’s life
- Typically, grantor transfers annual premium payments to the trust, and the TRUSTEE PAYS THE PREMIUM.
- Bene’s are given Crummey powers so that the premiums qualify for annual gift tax exclusions.
- Upon grantor’s death, the trustee distributes the death benefits to the bene’s based on terms of the trust
When can distributions from ILIT be included in gross estate of decedant?
- If the money is given to the executor of the estate to pay for TAXES
- A decedant’s will can instruct the ILIT to lend money to the executor to pay taxes
- Can also instruct ILIT to purhcase assets from the estate in excahnge for cash
- Those assets are then held in the trust and managed by the trustee
When can a life insurance policy be inluded in the decedant’s estate?
- If any of the following happen:
- The decedant was the owner and insured of the policiy at death
- The decedant had incident of ownership in the policy at time of death
- The decedant had transferred the policy OR had any incident of ownership WITHIN THREE YEARS OF DEATH
- A NEW life insurance policy being purchased by a trustee in a ILIT IS NOT SUBJECT TO THE THREE YEAR RULE
- When death benefits are made available to the executor or estate
Another strategy for liquidity - Split dollar life insurance
- An arrangement between an employer and employee where BOTH PARTIES have OWNERSHIP
- The employee pays premium (and owns) for death benefit
- Employer pays for (and owns) cash value of policy
- REVERSE SPLIT ORDER is the opposite
- Way to avoid gross estate is to put employee’s share of the policy into an ILIT
Loans for estate liquidity
- Loan can be used if there is really no liquidity left to pay for admin expenses and taxes
- Interest used to pay for those expenses can be DEDUCTED from ESTATE TAXES
Sale of personal/business assets
- Can be effective if assets are easily liquid
- NOT RECOMMENDED FOR ILLIQUID ASSETS
- Because they generally have to be appraised first and you probably have to do a fire sale to get money, which is very well below fair market value most times
- Should be last resort pretty much
Other strategies to provide estate liquidty?
- Using strategies such as martial deduction, charitable deductions, estate equalization, special use valuation, alternate valuation date could help REDUCE ESTATE TAXES, which in turn helps with liquidity.
What happens to tax deduction for when estate owes no tax?
- Some expenses can be deducted on the decedant’s income return rather than estate tax return