In the case of a small businessowner, the insurance solution is commonly a policy on the businessowner's life in an amount equal to the combined liquidity needs for both estates. This approach makes sense because most businessowners' estates are integrally related with their businesses, and the death of either the owner or the owner's spouse can have a detrimental impact on income flow.
Life insurance on the businessowner can be arranged in an irrevocable life insurance trust, which can then use the proceeds to provide the surviving spouse with an income and pay estate taxes at his or her later death. With this arrangement, it does not matter what the next generation of owners does with the business, since the surviving spouse is provided for.
A Plan for Larger Estates
In larger estates where there is no need to be concerned about a secure flow of income to the surviving spouse, it is common to recommend a second-to-die life insurance policy in the amount needed to pay estate taxes at the surviving spouse's death. The recommendation can be packaged inside the Survivor Life proposal folder (Form 5603), which outlines the advantages of using life insurance to pay estate taxes.
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