44. Discounted Dollars

Cash requirements for estate settlement expenses, including taxes and administrative costs, are substantial. These expenses must be paid before distributions can be made to the heirs, and that can cause a severe cash
strain for a long period of time.

There are three ways to pay those expenses.

First one can use the 100% method. The trustee would pay the taxes and expenses from existing cash and liquid assets from the estate. Thus one would pay 100% of the expenses and lose the income from those assets.

Second, one can use the 100% plus method. The trustee borrows the money, if possible. This involves additional costs since interest as well as the principal must be paid. In either case, if any assets are sold to raise the cash to pay the settlement expenses directly or to pay off any loans, an additional income tax liability could result.

The third method is to use the discounted dollars of life insurance. The premiums paid each year are a small percent of the face amount. The proceeds are paid directly to your beneficiary free of probate or income
taxes, and one may arrange to have the insurance proceeds excluded from the estate.

With life insurance you can pay the taxes and expenses for your estate rather than from your estate.

Tax reference verification 1-800-829-1040

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