Don’t Overlook Liquidity in Estate Planning

The purpose of an estate plan is to protect your family, loved ones, business partners and others who will be impacted by your death. Most people think in terms of the big issues, such as ensuring that the family business stays in the family, that the surviving spouse keeps the family home, and that children’s educations are provided for. When addressing these very important issues and others like them, it is important to consider liquidity for three reasons:

• The administrator of the estate will need access to cash for expenses such as probate costs and taxes, debts of the estate, funeral expenses and final medical expenses.
• If there are not liquid assets in the estate, it may be impossible to make distributions in accordance with the will or the law of intestate succession without selling off assets.
• In some cases, heirs may be unable to keep property bequeathed to them unless there is sufficient liquid capital available for related expenses.

Imagine, for example, that the deceased owned a piece of undeveloped property with significant value, and left that property to his son so that his son might one day build a home on the property. If the property is encumbered by a mortgage or simply subject to high property tax or maintenance costs, keeping the property will require adequate cash reserves. If the son does not personally have sufficient income or liquid assets to make those payments as they come due, he may be unable to keep the property simply because he cannot make a mortgage payment or keep up with the property taxes.

Of course, the son can still receive benefit from the bequest in that he can sell the property and receive the proceeds. However, the deceased’s wishes may be entirely subverted and the heir may lose the opportunity to use the property as both he and his father would have preferred.

With sufficient liquid assets in the estate, the decedent can arrange for adequate resources to allow his son to make mortgage payments and pay other related expenses until he is able to take over those payments, refinance the property, or otherwise arrange to maintain the property.

Planning for Estate Liquidity

Estate liquidity planning may include one or more of the following strategies:

• Making the estate the beneficiary of a life insurance policy that will provide adequate cash resources to pay costs of administration, allow the administrator to make distributions without being forced to sell property, and provide for cash bequests
• Ensuring that property which will become part of the estate include sufficient liquid or easily-liquidated assets, such as bank accounts and brokerage accounts
• Specifying property that is to be sold in order to provide cash to the estate, such as a second home or a personal collection of significant value that is not left to a specific heir

Easily Liquidated Assets

In planning for estate liquidity, it is important to consider the costs associated with liquidation of assets. These costs create an important distinction between assets that may otherwise seem similar in character. One common example is a certificate of deposit (CD). Though a CD is generally quick and easy to liquidate, penalties apply for cashing in early. Similarly, the process of selling stock isn’t difficult, but making a profit on stock requires purchasing and selling strategically. If the need for cash compels sale when the time isn’t right to sell, the estate may suffer a loss in value.

While accepting these losses may be preferable to selling other assets, it is obviously preferable to ensure that the estate has assets that can be converted to cash without penalties. And, of course, if you haven’t consciously planned for liquidity, your administrator may be forced to go further, selling real estate or other estate assets.

Make sure that estate liquidity is a component of your discussions with both your financial advisor and your estate planning attorney. Your estate lawyer will assist you in determining the degree of liquidity required to provide for costs of administration, protect the specific bequests you intend and ensure the assets can be distributed in the proportions you direct without forcing unanticipated sale of assets.