Consider an orange. Each part of the orange is worth more – or less – to different people. To some the juice is all that’s important. Others find the greatest value in the seeds. Yet others swear up and down that the skin of the orange is most valuable. As long as each gets what he or she wants, everyone is happy!
Now think about the things you own. When you die, the important people in your life get the things you own (that is, the oranges in your basket). Those people may include a spouse, children, extended family, business partners or others.
What piece of the oranges does each person get? A child working in the family business may feel that business is the most valuable part of the orange. Another might prefer stocks or other investments. A nephew might say that the collection of papers documenting your family history has value beyond measure – something a business partner would have absolutely no interest in. As with the orange, if everyone gets what he or she wants, everyone is happy.
There may be others who will also get things from your estate. Your family may have to pay personal debts (and sometimes business debts) when you die – it’s probably in your last will and testament or living trust. If not, a probate court may tell them to. If the things you own are worth enough, the government might get in line and demand death taxes. Own certain kinds of property, like retirement plans, and it may also demand income taxes. These people almost always want the juice from the orange; they want cash.
If there’s enough juice to satisfy both their thirst and to take care of your family, all is well. If not… Well, let’s just say it can be hard to use the family business or mountain cabin to pay debts and taxes. Forced sales usually do not fetch the highest prices. And that, quite simply, does not make for happy people.
The problem is even worse when circumstances make it hard (or financially distasteful) to come up with juice to pay debts or taxes. Consider a family in early 2009 faced with a need to raise cash when Dad’s estate consisted almost entirely of stocks. They certainly could have sold the stock. But doing so at what, perhaps, was the bottom of the market would leave only a bitter taste – much like the bitter rind of the orange.
To avoid such unpleasantries, you may want to ask yourself two questions. First, what do the people who are important in your life feel is the most important part of your oranges? Second, what part of those oranges will your family, practically speaking, use to pay debts and taxes.
If the answer to both questions is the juice and there’s not enough juice for both family and the IRS (and other creditors), it’s clear that someone is not going to be happy. If preventing that conflict is important to you (and not everyone feels it is), you will want to look for a way to make sure there will be enough juice for everyone.
Life insurance is often used to solve this problem and create extra juice. Why? Although some suggest it is a less expensive way to create cash, that’s not really the reason people buy life insurance. Certainly it’s usually better to pay less than more, but it’s not fundamentally what drives people to buy insurance. The real reason is that life insurance can create juice to pay the creditors and the IRS without taking it away from the family. And it does that at the exact moment it is most needed – when those creditors and the IRS come knocking at the door. Maybe you can even figure out a way to pay the premiums by using a part of the orange the family does not want!
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