When you think about estate planning concerns, the issue of liquidity is probably not the first thing that pops up. In fact, you might not have considered it at all – but you should. The estate planning attorneys at Morris Hall PLLC explain why having sufficient liquidity in your estate assets is an important factor if protecting loved ones is one of your estate planning goals.
What Happens After You Are Gone?
No one really wants to think about their own death; however, estate planning requires you to do that to protect the ones you love. The issue of insufficient estate liquidity, for example, is one of those issues that won’t become a problem until after you are gone. If it is a problem, it will come up during the probate of your estate. Probate is the legal process that will follow your death. Probate serves several functions, including the identification and valuation of estate assets, the payment of debts, and the distribution of estate assets.
What Does “Estate Liquidity” Mean?
You may have heard the term “liquid assets” before but never considered how it applies to your estate. Simply put, a liquid asset is one that can easily be converted into cash. Obviously, cash held in a checking or savings account qualifies as a liquid asset. Other assets have varying degrees of liquidity, based on how easily and/or quickly they can be turned into cash. Your home, for example, is not a liquid asset because it may take months to turn the home’s value into cash. The value of your estate’s liquid assets is often very important when it comes time to probate your estate.
Why Is Estate Liquidity Important?
During the probate of your estate, notice must be given to all creditors of the estate and those creditors must be allowed the opportunity to file claims against the estate. Creditor claims submitted to the court are reviewed by the Executor and approved or denied. Approved claims must then be paid out of the available estate assets. Likewise, any federal (and/or state) gift and estate taxes due must be paid out of the estate assets. If the estate has sufficient cash, either from a financial account or another source, paying those claims is a fairly simple process; however, if the estate lacks sufficient liquid assets to cover all the approved claims and the taxes that are due, the Executor of the estate will be forced to make some tough, and potentially unpopular, decisions that may impact the estate’s beneficiaries.
State law governs the order of priority in which claims and expenses must be paid during probate. Taxes, certain expenses, and approved creditor claims must be paid before probate can be wrapped up and the remaining assets distributed to beneficiaries. If the estate lacks the necessary liquid assets to pay those claims and expenses, the Executor must convert non-liquid assets into liquid assets. Typically, that entails selling estate assets to raise the necessary funds. Inevitably, the need to sell estate assets creates controversy because it means selling tangible assets that may have sentimental meaning to the estate’s beneficiaries. All too often an Executor is put in a position where he/she is forced to sell the family home or valuable heirlooms, which is not the desired result for anyone involved. It also increases the likelihood of conflict that could turn into litigation. If your estate becomes involved in litigation, it will dramatically increase the time it takes for loved ones to receive their intended inheritance and diminish the value of that inheritance because of the cost of litigation. It is these possible outcomes that highlight the need for sufficient liquidity.
To avoid problems after you are gone, make sure you are aware of the need for liquidity when you are creating and/or updating your estate plan. Just in case, consider using your Will or a Letter of Instruction to provide your Executor with guidance should the need to sell assets arise despite your efforts to leave behind sufficient liquid assets.
Contact Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about estate liquidity, contact the experienced estate planning attorneys at Morris Hall PLLC by calling 888-222-1328 to schedule your free consultation today.