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What Is Estate Preservation And Liquidity Needs Analysis?

Estate preservation and liquidity needs analysis is one of the ways you can determine the amount of life insurance you need. It focuses on providing liquidity--cash or property readily turned into cash--to cover the costs that occur at death. It thereby also serves the goal of avoiding the need to sell estate assets to cover these costs. The result is that you preserve the estate assets for the intended beneficiaries. Generally speaking, the analysis involves estimating the various expenses that will arise at death and then comparing these costs to the available liquid assets to pay these expenses. The gap between the expenses and the available liquid assets is the amount of life insurance you need.

Tip: This type of analysis is particularly useful if you have a large estate and anticipate sizable estate taxes. It can help avoid a situation in which the executor is forced to sell estate assets to raise cash for paying taxes and other expenses.

Figuring the Amount of Life Insurance Using This Analysis

Estate preservation and liquidity needs analysis essentially involves three steps:

  • Estimating the expenses at death requiring cash payment
  • Estimating the total value of other liquid assets available at death
  • Subtracting the amount of other liquid assets from the estimated expenses to find your life insurance needs

What Are The Expenses At Death That Require Cash?

A number of expenses arise at death. Unless you provide liquid assets to cover these expenses, the executor of the estate may have to sell estate assets (e.g., real estate or stock) and thereby reduce the value of the estate that can go to the heirs. The expenses may include the following:

  • Final medical costs from the last illness
  • Funeral and burial costs
  • Executor's fees
  • Attorney's fees
  • Appraiser's fees
  • Probate court costs
  • Debts (e.g., mortgages, car loans, college loans, credit card debt, and any unpaid bills)
  • Taxes (federal estate taxes, federal gift taxes, federal generation-skipping transfer taxes, state death taxes, and personal income taxes)
  • Family business expenses (e.g., immediate payroll needs and costs of recruiting and training a successor)

Although there may be other sources of liquidity to pay off these expenses, life insurance is perhaps the best option.

What Are Other Liquid Assets That Might Be Available?

Before estimating the amount of life insurance you need for estate preservation and liquidity needs, you need to estimate the amount of liquidity from other sources, such as existing life insurance policies, savings bonds, savings accounts, checking accounts, and certificates of deposit.

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Subtracting Other Liquid Assets from Expenses

It is likely that other liquid assets won't be enough to cover the various expenses at death, particularly if a sizable estate is involved. The difference is the amount of life insurance you need.

Tip: You are well advised to revisit these calculations periodically. Your circumstances may change and thereby affect your estimates of the expenses at death, the available liquid assets, or both. As a result, you may need to revise your life insurance needs.

Integrate Estate Preservation and Liquidity Needs Analysis into Your Overall Estate Planning

Conduct your estate preservation and liquidity needs analysis in the context of overall estate planning. Life insurance is an important tool in estate planning, but you shouldn't consider it in a vacuum. For instance, you might consider setting up an irrevocable life insurance trust (ILIT). This type of trust can remove life insurance proceeds from the insured's and surviving spouse's taxable estates. As a result, you can reduce estate taxes. You can also use other tools (such as, lifetime gifting, the applicable exclusion amount (formerly known as the unified credit), and the unlimited marital deduction) to reduce estate tax expenses that require cash upon death. If you have a family business, you might integrate life insurance with a buy-sell agreement for succession of the business. Look at the overall picture with your financial advisors.


Particularly Useful For Large Estates

This analysis is particularly useful for people with large estates who face potentially hefty estate taxes and other expenses at death.

More Useful For Households without Children or Dependents

Since this analysis focuses exclusively on the lump-sum costs at death and not on ongoing income needs of other family members, it is most useful in situations where the ongoing income needs are small. Thus, single people or families without children or other dependents will find this analysis more useful than will families with non-working spouses or children.


Doesn't Address Ongoing Income Needs of Surviving Family Members

Focusing exclusively on the lump-sum costs at death ignores the ongoing income needs of surviving family members. As a result, this analysis is of more limited value to families with spouses, children, or other dependents who will require a stream of income after the insured dies. The family needs approach is more useful in these situations.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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