Estate Planning and Life Insurance

A good estate plan is like a three legged stool. Each leg is constructed and positioned in such a way to give the stool stability and function. The three legs of any estate plan are the dispositional plan, the tax plan and the liquidity plan. This is true irrespective of the size of the estate.

The dispositional plan documents who gets what and when and who makes a decision when you cannot. The tax plan engages strategies and documents that can reduce any estate tax exposure through discounts, appreciation shifting or charitable planning. The liquidity plan directs how resources will be used to provide survivor income to families, finance education for children and grandchildren, pay off debts, finance Federal and State Estate taxes, provide for charitable dispositions, and fund the succession of an interest in a business.

The development of a liquidity plan involves the assessment of the objectives for all of the above, an examination of the resources and techniques that will finance these objectives and then determine any surplus or deficit. If a deficit is discovered, it can be made up with life insurance. The art of using life insurance as part of the liquidity plan is determining the right amount, determining the right duration and determining the right ownership and beneficiary arrangement. Further, if the right ownership and beneficiary arrangements are funded by annual or lifetime gifts and the gifts are insufficient to fund the life insurance needed for the liquidity plan, additional creativity will be warranted to find the resources to fund the fund the liquidity plan.

The hallmark of a good estate plan is the stability it creates for the family and other survivors combined with the resources to accomplish its function. A liquidity plan deficit that is financed with life insurance is often the best resource to create the liquidity needed and balance the estate plan, no matter the size of the estate.