Estate planning for illiquid estates

For owners who are above the line, the estate-tax problem is rarely about the rate. It is about liquidity. The wealth is locked in things that do not sell quickly, a business, real estate, land, while the tax is due in cash roughly nine months after death. Solve that mismatch and the rest is manageable. Ignore it, and the heirs sell a sound asset at a discount to pay a tax assessed on that very asset.

There are two moves, and they work in order: shrink the estate, then fund the tax on what remains. This guide walks both, and points to the deeper pieces and the calculator as you go.

The threshold question is arithmetic. Add up everything you own at fair market value, the business, real estate, retirement and investment accounts, life insurance you personally own, and compare it to your exemption: $15 million as an individual, $30 million as a married couple using portability. Below that, no federal estate tax. Above it, a flat 40% applies to the amount over the line.

Two things owners routinely miss. First, a business is usually worth more to the tax computation than the owner assumes, and the valuation is contestable, which is the CPA's and appraiser's work to pin down. Second, life insurance you personally own is counted in your estate, which matters a great deal for the funding step below. If you are a Florida resident, there is at least no state estate tax to add on top; the federal figure is the whole bill.

Every dollar moved out of the taxable estate now, along with its future growth, is a dollar the 40% never touches and a dollar the funding step never has to cover. Lifetime gifting and irrevocable trusts are the tools, and they are the attorney's and CPA's to design and draft.

The decision owners find hardest here is access. An irrevocable life insurance trust (ILIT) moves assets and their growth cleanly out of the estate, but what goes in is out of reach. A spousal lifetime access trust (SLAT) keeps the same estate-tax benefit while softening that tradeoff: one spouse funds it for the other, so the couple retains indirect access during life. The choice between them, and the real cautions that come with a SLAT, are legal and tax questions, not insurance ones, but which one is chosen changes how any policy inside the trust should be structured.

Whatever taxable estate is left after shrinking still generates a cash bill. This is the job life insurance is built for in an estate: it delivers tax-free cash at the exact moment the tax is due, so nothing has to be sold to raise it. For a married couple it fits especially cleanly, because the marital deduction generally defers the tax to the second death, and a survivorship (second-to-die) policy is designed to pay at precisely that moment, usually at a lower premium than two single-life policies.

One structural point decides whether it works. If the insured owns the policy, the death benefit is pulled back into the taxable estate, so the coverage meant to pay the tax gets partly taxed itself. Owned instead by an irrevocable trust, the benefit lands outside the estate and covers the bill in full. There is also a non-insurance path worth naming for honesty: a closely held business estate can sometimes elect to pay the tax in installments over years. It helps with timing, but it carries interest and conditions and does not create cash, the money still comes out of the business.

The line is clean and worth stating plainly. The planning and the tax determinations are the CPA's. The trusts, and the ownership decisions that make them work, are the attorney's to draft. LogicPoint's part is the insurance funding within that plan: sizing the coverage to the projected liability and structuring it, typically inside the trust your attorney designs, so it pays where and when it is supposed to. We do not draft trusts and we do not give tax advice. We fund the plan your advisors build, and we say so directly when a structure does not fit.

This guide is educational and general. Estate-tax figures are set by federal law and change over time; confirm current numbers and your own exposure with your CPA. Trusts and estate strategies must be designed and drafted by a qualified attorney and coordinated with your CPA. Insurance products are subject to underwriting approval. LogicPoint Advisors does not provide legal or tax advice and does not draft trusts. Cosmin Mandachescu · FL 2-15 License #G335891.