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Tzaddikim die on the day they were born, meaning that their death is an elevation of the higher levels of the soul, that [the soul] disrobes from the bodily levush sak [garments of skin] and enclothes in the spiritual chaluka d’Rabbanan [garments of light] to enter into supernal worlds.
Likutei Sichos, vol. 5, p. 86

This is why tzaddikim are called alive after their passing, because they are in fact truly alive, no longer limited by being enclothed in a lowly body of dust. Their true and eternal life begins when they shed the garment (the “body”) of this world.

Due to a [tzaddik’s] actions and great level he will merit that he will not die ever…He will merit that his soul will exist in his body forever…and when the time comes to pass away and to separate from the world he won’t need to undergo an interruption and to die, but rather his body will return to a spiritual state…and this refers to those called “bnei aliyah” [“those who have achieved elevation”].
Ma’areches HaElokus, ch. 8

This is hinted at in the statement that “tzaddikim die on the day they were born”. This statement is telling us that the tzaddik’s “birth” in the World to Come appears as his “death” in this world—his soul exchanges the “garments of skin” for the “garments of light”. As he appears to have died in this world, he has actually been born in the higher world. Of course this is not really death at all (except the way that it appears to fleshly eyes.)

The Rebbe brings out this connection in the discourse Padah b’Sholom14 (published for distribution in 5751, the year “Nun Alef”). In that discourse, the Rebbe explains how the Mitteler Rebbe’s Hillula (9 Kislev, when he passed away) serves as a preparation for his day of Geulah (10 Kislev, the day on which, one year prior, he had been released from Russian prison). In the Rebbe’s words:

…the greatness of the elevation of the Mitteler Rebbe’s day of Geulah [10 Kislev]…is due to the fact that the preceding day is the Hillula of the Mitteler Rebbe…the day of 9 Kislev, the Hillula, is the eve of the day of Geulah…which comes after the preparation of the Avodah of the Hillula…
Maamorim Melukatim 5, pp. 86, 90

In other words, the one leads to the other: first the Hillula, then the Geulah! From this we see that after the tzaddik has completed all matters of Avodah, he must then shed the fleshly body of this world in order to experience Geulah. Thus, the Histalkus of tzaddikim becomes a Hillula, a day of celebration since the day they “died” is really the day they are “born” into true, eternal life (regardless of the date of birth, which only in rare cases coincides on the calendar, as the Rebbe mentions).

[…]The Midrash Rabba states, “’good’—this is the angel of life, ‘very good’—this is the angel of death”. Why is the angel of death “very good”? Because the Histalkus of tzaddikim is the completion of everything they did in their life in this world. It only appears to our fleshly eyes to resemble “death”. But, in truth, when the completed soul departs from the “skin of the snake” after it has been emptied of holy sparks, a great elevation occurs—to the level of the Resurrection of the Dead.

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