As insurance professionals know, federal estate taxes will recommence on January 1, 2011, ending nearly a decade of confusion regarding their future.
This confusion has made it difficult for planners to assist clients in creating programs to ameliorate these taxes. Since virtually no one knows precisely when a person will die, it has been impossible to come up with a foolproof plan–because of the lack of certainty about estate taxes.
If a client has sufficient personal wealth to be subject to the estate tax, that client will be in good shape if he or she dies in 2010. But should the client survive 2010, planning may be needed to avoid the confiscatory estate taxes that come back with a vengeance in 2011.
The difficulty with estate planning always lies in the inability to predict what tax changes will take place every time Congress meets, plus the inability to predict when a person will die. Regardless, one thing is always certain: Liquidity helps to overcome whatever obstacles that may occur. The easiest and most efficient method for providing this liquidity is life insurance, and planners have recommended its use for estate liquidity for as long as estate taxes have existed.
The need for liquidity arises because of the timing of calculation of estate taxes and their payment.
The Internal Revenue Service is expert at determining the value of estate property at its highest point, particularly illiquid estate property like closely held businesses and real estate. It is not unusual for the IRS to try to value illiquid property as of time of death (or, when permitted, at an alternative date) as though the property is easily salable on the open market. If, in fact, there is a shallow market for such property, a dispute often arises between the IRS and the estate over the actual value to ascribe for purposes of levying the estate taxes.
This lack of accord over the value of estate assets often requires appraisals that can escalate the property value over what the actual value is when a sale takes place.
Moreover, the IRS expects to be paid promptly. This is often difficult when large portions of the estate are illiquid and will take a considerable amount of time to convert to cash. This is exacerbated if the family desires to retain the illiquid asset.
Thus, the need for a source of liquidity while everything gets sorted out.