Overview

When someone dies owning valuable but illiquid assets (real estate, closely held business interests, art, etc.), the estate may owe federal or state estate taxes but not have the cash on hand to pay them. Executors and families face a few practical choices: raise cash, borrow, use tax rules that allow deferral, or reduce the taxable estate before death through planning. This article walks through common, reliable options, implementation steps, pros and cons, and documentation you’ll need as an executor or advisor.

Sources and law references used in this article include the IRS estates pages and Form 706 guidance (see IRS: Estates) and standard industry practice. This information is educational and not individualized tax or legal advice — consult a CPA and an estate attorney for your situation.

Source note: IRS guidance on estate taxes and payment options is available at https://www.irs.gov/businesses/small-businesses-self-employed/estates.

Practical funding options (detailed)

  1. Life insurance—owning a policy to create immediate liquidity
  • How it works: A life insurance death benefit can provide the cash to pay estate taxes immediately and cleanly. Policies can be permanent (whole, universal) or term scaled to the risk window.
  • Implementation choices: hold the policy inside the decedent’s estate (proceeds may be includable in gross estate) or, more commonly for tax planning, fund an Irrevocable Life Insurance Trust (ILIT) that owns the policy outside the estate so proceeds are not includable. For situations that require quicker setup, an existing policy owned by the decedent may still be used to pay taxes but could increase estate inclusion.
  • Pros: Fast liquidity, predictable amount, tax-free proceeds to beneficiaries under IRC §101 (subject to inclusion rules).
  • Cons: Cost of premiums (especially late-life purchases), medical underwriting issues, and trust setup time if creating an ILIT pre-death.
  • Related FinHelp resource: see our guide on leveraging life insurance for estate liquidity: “Leveraging Life Insurance for Estate Liquidity Without an ILIT” (https://finhelp.io/glossary/leveraging-life-insurance-for-estate-liquidity-without-an-ilit/).
  1. Election to pay in installments (IRC §6166)
  • How it works: Estates that qualify because they include a closely held business may elect to pay estate tax in installments under Internal Revenue Code §6166. The election can defer payment for up to 10 years, with interest accrual, and can be essential when the estate’s value is in a business that must remain operating.
  • Eligibility and limits: This election is limited and has strict qualifying criteria—primarily that a significant portion of the estate’s value is in a closely held business. Use Form 706 and consult the Form 706 instructions and IRS guidance when evaluating eligibility.
  • Pros: Avoids forced sale of the business and spreads payments over time.
  • Cons: Interest accrues, and defaults can lead to acceleration; careful compliance and cash flow forecasting are required.
  1. Installment agreements or offers in compromise with the IRS
  • How it works: For estates that don’t qualify under §6166, an executor can request an installment agreement with the IRS to pay estate tax over time, although the IRS typically expects prompt payment and charges interest and potential penalties.
  • Practical note: Installment agreements for estate taxes are less common and generally harder to obtain than for individual income taxes; acceptance depends on the estate’s ability to pay and the absence of other collection alternatives.
  1. Using insurance policy loans, borrowing against assets, or obtaining estate financing
  • How it works: Executors may arrange short-term loans secured by estate assets—mortgages, pledges of securities, or bank lines of credit—or borrow against the cash value of life insurance policies. Specialized lenders provide estate tax loans and bridge financing to pay taxes until longer-term solutions are executed.
  • Pros: Can preserve family property and business continuity.
  • Cons: Interest and administrative costs; loans reduce net estate value and may be secured by the very assets you’re trying to preserve.
  • Practical tip: Shop lenders and confirm repayment timing tied to sale or refinancing plans.
  1. Selling assets—structured sales and partial sales
  • How it works: Selling a portion of the estate’s assets (an easement on real property, fractional sale of a business interest, or targeted asset liquidation) can raise necessary cash while preserving core holdings.
  • Tax considerations: Sales can trigger capital gains or change basis; timing and sale structure affect both estate taxes and income taxes for the estate or beneficiaries.
  1. Gifts, pre-death planning, and portability strategies
  • How it works: Lifetime gifting reduces the size of the taxable estate; spouses can use portability of the deceased spousal unused exclusion (DSUE) to preserve unused exemption. Advanced vehicles include grantor retained annuity trusts (GRATs), irrevocable trusts, and charitable lead or remainder trusts to reduce estate exposure.
  • When to use: Mostly a pre-death planning strategy—less applicable once someone has already died, but important for clients planning now to avoid future liquidity crises.
  • Related FinHelp resources: “Minimizing Estate Taxes with Portability and Gifting” (https://finhelp.io/glossary/minimizing-estate-taxes-with-portability-and-gifting/).
  1. Charitable strategies and conservation easements
  • How it works: Leaving assets to charity or placing conservation easements can lower the estate’s taxable value while fulfilling philanthropic goals. Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs) are two common vehicles.
  • Pros: Immediate tax reduction and potential income for heirs; aligns tax strategy with legacy goals.
  • Cons: Irrevocable transfers and complexity; counsel required.

Step-by-step checklist for executors when taxes are due and cash is scarce

  1. Confirm the deadline and file Form 706 if required. Filing deadlines and extension rules matter—Form 706 must generally be filed within nine months of death (and Form 4768 can extend filing, not payment). See IRS guidance.
  2. Value the estate and calculate provisional tax liability—work with a qualified appraiser for real estate, closely held businesses, and unique assets.
  3. Identify liquid assets available immediately (bank accounts, marketable securities) and prioritize paying immediate liabilities.
  4. Explore life insurance proceeds and ownership status: determine whether proceeds are includable in the estate or held in a trust outside the estate.
  5. Evaluate IRC §6166 eligibility for closely held business deferral and request the election if appropriate.
  6. Get quotes for short-term bridge loans or estate financing and compare effective cost (interest + fees) vs. selling assets.
  7. If necessary, negotiate installment terms with the IRS or request temporary relief while pursuing financing. Document all communications.
  8. Keep beneficiaries informed but limit decisions to the executor’s fiduciary duty and legal counsel’s advice.

Common mistakes and how to avoid them

  • Assuming quick liquidation of real estate is possible: Allow realistic time for marketing, appraisal, and sale; temporary financing is often less expensive than a fire sale.
  • Overlooking state estate or inheritance taxes: Several states impose their own taxes with lower exemptions—plan for both federal and state obligations.
  • Failing to verify insurance ownership and beneficiary designations: A policy owned by the decedent may be included in the gross estate; a trust-owned policy usually is not.
  • Missing the narrowly tailored §6166 deadline or eligibility rules: Late elections or incomplete documentation can foreclose an important deferral option.

Costs, timing, and documentation

  • Documentation typically required: appraisals, Form 706 (estate tax return), proof of insurance ownership and beneficiary designations, loan agreements, and trust documents.
  • Costs to expect: appraisal fees, premium costs for late-life life insurance procurement, interest on loans or installment plans, professional fees (CPA, attorney, appraisers), and possible capital gains or transfer taxes if assets are sold.

When to involve professionals

Engage a CPA experienced in estate tax returns, an estate and probate attorney, and a life insurance agent who understands estate planning. In my practice advising families with illiquid estates, early coordination of these specialists reduces rushed decisions that can cost heirs value.

Quick examples

  • Family with a rental portfolio: Used a short-term bank line secured by rental properties to pay the estate tax and then refinanced after stabilizing rents.
  • Closely held business: Qualifying executor made the §6166 election, paid smaller annual installments, and avoided selling the business during a downturn.
  • Real estate-rich estate: Purchased a life insurance policy in advance and used the death benefit to pay taxes—policy owned in an ILIT to keep proceeds out of the estate.

Final considerations and practical advice

  • Start planning early: lifetime gifting, proper beneficiary designations, and trust structures (ILITs, GRITs, CLTs) are far cheaper than emergency measures after death.
  • Keep a liquidity-focused estate map: list where cash and borrowing capacity exist and review this with your advisor every 2–3 years.
  • Document intentions: if you want heirs to keep real property or a business, include plans for funding taxes in your estate plan and name executors who understand financial decisions.

Further reading

Professional disclaimer: This article is educational only and does not provide legal, tax, or investment advice. Laws change and a personalized plan requires review by a qualified CPA and estate attorney.

Author note: In my 15+ years advising clients with illiquid estates, the most common bright line is preparation — a small premium on planning (life insurance or trust work) typically avoids a much larger family cost at settlement.