You might, at one time or another, have been advised to take up insurance to cover your final payment of estate duty.

Indeed, taking out an insurance policy to cover the estate duties payable upon your demise sounds like an attractive proposition – after all, it means that all the value of what you leave behind can be passed on to friends, relatives or favourite charities without worrying about the impact of ‘death tax’.

Suppose a person has a potential estate value of S$2.6 million, based on the assets they currently own, excluding residential property but including estimated insurance payouts if they were to pass away today.

After deducting the exemption amount of S$600,000, S$2 million of the estate will be taxable at a rate of 5%, which amounts to S$100,000, but an insurance policy could ensure that this liability passes to the insurance company. Of course this S$100,000 may also be taxed for estate duty, but the principal amount remains largely intact, and all for a relatively small annual premium.

But as useful as these quick calculations are, your discovery process should involve much more – how much to leave behind for your children’s tertiary education, whether you want the outstanding mortgage on your property to be paid, and how much your family would need in order to maintain a certain lifestyle, for example.

So make sure your adviser isn’t trying to sell you a policy to cover your estate duty just because he’s sold you everything else. Paying your estate duty is really a liquidity issue as your family members need to be able to get guaranteed access to liquid assets in the short term, wherever and whenever required, after you have taken care of your capital needs.

Why? Because assets usually remain frozen until estate duty has been paid off, so only then will the necessary legal papers be issued for your family to claim all your assets.

It’s a good idea to seek advice on how those assets should be structured and held because although planning for your liquidity needs is not difficult it does require some skill. Start by making a quick estimation of your potential estate duty and see how best you can set aside the liquid assets for this.

THIS ARTICLE IS REPRODUCED COURTESY OF SMART INVESTOR MAGAZINE