The costs associated with lack of preparation can be considerable; including the forced sale of assets, loss of control of the family business or investments, shrinkage of income producing assets, and so forth. Generally, an executor has nine months to settle the estate tax bill. During that time period vital decisions must be made as to how to create liquidity for tax payment, business continuity, and generally redistribute and manage assets during the ownership transition. For many families this is a difficult time at best.

A well-structured plan will likely employ tools such as gifting programs, shared ownership, and entitization (placing assets into different entities, e.g. family limited partnerships, trusts) to achieve estate tax discounts. Many of the tools achieve tax discounts because they require relinquishment of some control. Usually there is a point where families are reluctant to further forgo control over assets to achieve tax reductions due to concerns that the assets may be needed in the future or that tax laws may change. In return for flexibility many will accept some transfer tax. 

For the taxes that must be paid, what is the cost of settling estate taxes with the estate owner's funds? Even if liquid assets are set aside for estate taxes, the earmarked fund is itself taxable, thus two dollars are needed for each estate tax dollar due. The fund's earnings would be income taxable and the entire fund would be subject to creditor claims. Circumstances and time may be inopportune for creating such a large, liquid fund before the tax is due. Additionally, an estate has further challenges, including difficulty in dividing the estate amongst heirs, loss of family control over key assets, and who would enjoy writing a large check to the government? 

What if there was a means to fund estate taxes at a substantial discount? Since death triggers the tax payment, we don't truly need estate tax funding until the second death (the later death of the husband or wife). Survivorship life insurance policies do exactly that by insuring both husband and wife, creating liquidity by paying out proceeds at the second death when estate taxes are due. Survivorship policies cost approximately half that of insuring each spouse individually, and if owned properly, the proceeds are free of income tax, estate tax, creditor claims, and probate. The cumulative premium invested in a survivor life policy for a healthy 60 year old married couple is approximately 10% of the death benefit produced (the cost is lower for a younger couple and higher for an older couple). 

Due to the opportunity to exclude life insurance from the taxable estate, life insurance can be used as a financial tool to deeply discount estate taxes by providing liquidity at the precise time it is needed. Policy ownership is important to avoid potential tax pitfalls because if one owns a policy on their own life the proceeds will be includable in their estate and subject to estate tax. To avoid estate inclusion of life insurance proceeds the policy must be owned outside of the estate, by either a third party or an entity, as you should not be taxed on a policy you do not own. The choice is predicated on control and flexibility.

The estate planning team uses available techniques and tools to reduce a family's estate taxes to the lowest practical level given the family's comfort zone. For the estate taxes that remain, life insurance can act as an effective tool to assure family control over assets and deeply discount estate taxes. If dramatic discounts are available through structured planning why would one want to pay their estate taxes at full price?