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Survivorship insurance allows heirs to avoid having to sell illiquid assets to pay estate taxes

Estate planning can be a complex process, with many things to take into account. One of the issues in estate planning that is sometimes overlooked is the importance of providing funds for an estate to pay its estate taxes. When that happens, heirs may be forced to sell assets they don't want to sell-like real estate, businesses, investments or valuable personal property-in order to cover the costs.

This situation is not all that uncommon. In order to help address the problem, more and more people are turning to survivorship insurance, sometimes called second-to-die insurance. Traditional life policies pay a benefit upon the death of the insured individual, but survivorships cover the lives to two people and pay the benefits only when the second person dies. While these polices have many uses, one of their common uses is to pay a couple's estate taxes upon the death of the surviving spouse.

In estate planning, these policies are often used by wealthy couples who take advantage of the unlimited marital deduction, which allows a spouse to pass assets tax-free to their surviving spouse. At the death of the surviving spouse, the benefits from the survivorship policy are used to pay any estate tax owed by the estate.

The popularity of these polices has increased recently due to the upcoming expiration of the $5 million estate tax exemption amount, which is set to be reduced to $1 million in 2013, unless Congress acts to extend it.

Of course, another goal of estate planning is to reduce the amount of estate taxes owed by an estate. But it can be well worth it to purchase survivorship insurance, if it allows one's heirs to keep illiquid assets received from the estate.

Source: Fox Business, "Survivorship Life Insurance: It's Heir Care," Jay MacDonald, September 10, 2012

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