Insurance and liquidity

Estate tax payment timing

When a federal estate tax return is required, federal estate tax generally is payable nine months after death. A filing extension does not itself extend payment, although separate payment relief may apply.

Compare expected estate cash needs with available cash. Organize policy records, beneficiary designations, premium records, outstanding loans and business buyout obligations for the review.

Installments for qualifying business estates

A federal installment election can defer qualifying estate tax when the decedent was a U.S. citizen or resident and a qualifying closely held business interest included in the gross estate exceeds 35% of the adjusted gross estate.

Adjusted gross estate is gross estate reduced by allowable deductions under the estate expense and loss provisions identified in the sources.

The installment amount cannot exceed net estate tax multiplied by the qualifying business amount divided by the adjusted gross estate. The election is due by the estate tax return deadline, including extensions.

The standard election permits two through ten equal installments. The first is due no later than five years after the original payment date, with later installments due annually.

Interest remains payable annually during the initial deferral and with each subsequent installment. If a shorter initial deferral is selected, that shorter period applies to the interest schedule.

Special elections can eliminate the initial deferral or shorten the installment schedule, so the standard maximum is not universal. Installment relief does not create cash or defer every estate liability.

What to review together

For insurance planning, bring the policy, ownership and beneficiary records, transfer history and any obligation to pay estate expenses. For a business buyout, review the agreement and policy together.

The linked guides cover insurance ownership, trust arrangements and business funding. Use them to organize a discussion around your family's assets, cash needs and existing coverage.

Two related terms

• Incidents of ownership

  These are policy rights, including economic rights beyond legal title.

• Irrevocable life insurance trust

  An irrevocable life insurance trust, or ILIT, is a trust used to hold life insurance.

Four resources for your next review

• How estate liquidity works when wealth is tied up in assets

  Start here if the balance sheet is substantial but available cash is limited. Use the guide to frame cash needs around your business, real estate and private investments.

• How life insurance ownership affects an estate

  Open this when reviewing the policy owner and beneficiary together. Focus your next discussion on policy rights and estate payment obligations.

• How irrevocable life insurance trusts work

  Read this before discussing a policy transfer or reviewing an existing insurance trust. Bring the trust document, transfer history and premium funding records to that conversation.

• How insurance funds business buy-sell agreements

  Choose this if a death or disability buyout is part of the cash planning discussion. Review the agreement alongside the related insurance records.

Investor perspective

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Questions about insurance and estate inclusion

• Are life insurance proceeds payable to the estate included in the federal gross estate?

  Yes. Proceeds on the decedent's life receivable by the executor or administrator, payable to the estate, or payable to another beneficiary legally bound to pay estate taxes, debts or enforceable charges are included.

  For a beneficiary with a binding obligation, inclusion extends only to proceeds required to satisfy that obligation. Naming someone other than the estate does not, by itself, avoid this rule.

  Insurance used as collateral for the decedent's borrowing is also treated as receivable for the estate's benefit. If local community property law makes half of estate payable proceeds the surviving spouse's property, only the estate's half is included under this rule.

  Gross estate inclusion does not calculate tax actually owed.

• Can proceeds payable to another beneficiary still be included?

  Yes, if the insured held incidents of ownership at death, alone or jointly, proceeds payable to other beneficiaries are included under the federal insurance inclusion rule.

  Relevant rights include changing the beneficiary, surrendering or canceling the policy, assigning it, revoking an assignment, pledging it or borrowing against its surrender value. Applicable state or other law affects the rights analysis.

  Trustee powers can qualify if they change beneficial ownership or the time or manner of enjoyment, even without a beneficial trust interest. Absence of inclusion under the insurance rule does not exclude another federal inclusion provision.

• Does an ILIT automatically keep insurance outside the federal gross estate?

  No. The trust label alone does not establish exclusion, and transferring an existing policy interest or relinquishing a power within three years of death can cause inclusion if retaining it would have triggered specified federal inclusion rules.

  A bona fide sale for adequate and full consideration in money or money's worth is excepted from this transfer rule.

  The three year rule requires the decedent's transfer or relinquishment. A trust's purchase of a policy within three years of death does not alone trigger it.

  Separately examine retained enjoyment, income or powers to designate who enjoys the property or income for life, a period measured by death or a period that did not end before death. Also check estate payment obligations.