Each October, National Estate Planning Awareness Month encourages families, business owners, and financial professionals to revisit the strategies that safeguard wealth and ensure smooth transitions across generations. For professionals in the advanced markets, it’s a chance to emphasize not just tax minimization but a more pressing issue—liquidity.
Even with today’s historically high exemptions under the One Big Beautiful Bill Act (OBBBA), ultra‑high‑net‑worth individuals (including business owners) remain exposed to significant estate tax obligations. The challenge isn’t just the tax liability itself, but the need to raise the cash within nine months after death. Estates dominated by illiquid assets often force heirs into quick, value-eroding sales that fracture both businesses and legacies.
The Nature of Liquidity Risk
Liquidity risk arises when the estate’s assets cannot be readily converted into cash to cover federal and state estate taxes, income taxes triggered at death, administrative expenses (legal, accounting, appraisal fees), debts and liabilities of the decedent, and equalization needs among heirs.
This is a common problem for estates heavily weighted with illiquid assets, such as:
• Closely held businesses. While strong wealth creators, businesses are notoriously illiquid, and a rushed sale signals distress and drives down the valuation.
• Real estate holdings. Farms, ranches, and commercial properties often carry deep ties and are hard to divide or quickly liquidate.
• Other illiquid assets. Art, mineral rights, partnership interests, and restricted stock are all valuable on paper but slow to convert into cash.
Executors under deadline pressure may be forced to sell businesses, properties, or concentrated holdings at a discount—undermining family, financial, and legacy goals.
Life Insurance: The Essential Liquidity Solution
For producers, the advantages of life insurance are well known and often repeated—immediate liquidity, contractual certainty, and unmatched leverage for powerful financial efficiency. For clients, though, the advantage may be a vague “protection.” You can sharpen and reframe the way they view life insurance and its role in estate planning by reminding them that the real risk isn’t the estate tax itself but the liquidity issue it creates. Seen through this lens, life insurance moves from an option to the default solution—the one tool that allows every other strategy to work as intended.
When clients suggest that their heirs can “just sell something” or “borrow against the business,” you can counter with the harsher reality—depressed values for rushed sales, the impractical burden of borrowing during estate settlement, or the impact of sidelining capital that could otherwise be invested productively. Section 6166 may defer the problem but doesn’t solve it. These options can play a supporting role, but they can’t anchor a truly efficient liquidity strategy.
Reframing the Conversation
Too often, clients approach estate planning with an overly narrow focus on minimizing estate tax exposure. The more pressing question is: How will the tax be paid without dismantling the estate?
A structured approach can guide clients to a broader view:
1. Quantify obligations (estate tax, debts, expenses)
2. Assess liquidity (which assets can be converted into cash and how quickly)
3. Identify gaps
4. Design solutions (life insurance as the core liquidity tool, supplemented by other strategies as appropriate)
This approach lets you shift the conversation from technical compliance to legacy preservation.
Case Illustration: Preserving the Family Business
A business owner in his late 70s owns a $50 million closely held business that comprises more than 80% of his wealth. He has two children—one active in the business and one not. After exemptions and charitable gifts, his taxable estate is $20 million, leaving an $8 million estate tax bill. Liquid assets cover only $2 million.
The challenge: Selling part of the business risks discounted valuations and potential damage to the business itself. Borrowing may be impractical or impossible during a transition.
The solution: The business owner creates an irrevocable life insurance trust (ILIT) to hold a $15 million permanent policy, funded with annual exclusion gifts and exemption amounts. At his death, the ILIT will provide tax-free proceeds outside the estate.
The outcome: When the business owner passes away:
• Estate taxes are paid without a fire sale.
• The inactive child receives cash, while the active child retains business control.
• Real estate avoids forced liquidation, preserving it for strategic decisions.
• The family’s legacy and the business’s continuity remain intact.
The Takeaway
The liquidity question isn’t theoretical—it’s a nine-month deadline. Framing it that way creates urgency and shifts the conversation from tax avoidance to legacy preservation. That’s where life insurance earns its place as the indispensable tool in estate planning, providing immediate cash that preserves continuity, protects legacies, and safeguards family futures.
