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Life insurance for paying of estate taxes, P.2

In our last post, we began speaking about the importance of ensuring your estate has enough funds to pay of taxes and other expenses related to winding down the estate. We noted that the first step in the process should be to determine your tax liability and other expenses. The next step is setting aside the funds to cover those costs.

Heirs have nine months to determine the amount of taxes owed and to pay the amount. If planning is poor, heirs may be forced to sell their inheritance or borrow money to pay off estate expenses. That isn't a situation you want to put your heirs through.

What type of asset is good to set aside for this purpose? Money invested in stocks and bonds are liquid, but are not a great asset to depend on during sluggish economy, since selling these assets in a depressed market will leave less cash to work with in the end.

Property cannot always be easily converted into cash, and is subject to fluctuating market prices. Housing, family farms and business are all in this category. Because these are non-liquid assets, they aren't the kind of asset you want to count on covering your estate's expenses.

Life insurance is an excellent way to provide funds for these costs, and has some advantages over other potential ways of covering expenses. A whole life insurance policy, placed in a trust to remove it from your estate, would not add anything to your estate tax, and heirs would be able to access the funds and utilize the proceeds to pay of estate taxes and other expenses.

Of course, you should work with qualified professionals in setting this type of a scheme. Doing so could mean less stress, and more inheritance, for your heirs.

Source: Fox Business, "How Life Insurance Can Save Heirs a Bundle," Margarette Burnette, Sep 27, 2011.

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