How Important is Estate Liquidity?

September 10, 2014

estate liquidityOne of the primary goals of estate planning is to help your loved ones after your death, both financially and emotionally. Adequate planning can help minimize the financial burden and stress on those you leave behind. Building liquidity into your estate plan can help to provide sufficient financial resources available to cover estate settlement costs, as well as any taxes that may be due.

Why is estate liquidity necessary?

When a person dies, there are taxes and debts that need to be paid within a short period of time.  For example, funeral expenses, medical expenses, unpaid debts, probate costs and estate taxes.  For this reason, it is a good idea for there to be some cash available to cover these expenses.  When an estate consists mainly of real estate, then there may be an issue with estate liquidity.  Estate planning can incorporate steps to provide sufficient liquidity for your estate.
When there are sizable debts or estate taxes to be paid, the trustee or personal representative will sometimes be required to sell assets in order to reduce them to cash.  Doing so can have a huge effect on the amount of inheritance the heirs will ultimately receive.  More importantly, if there is a family business that you want to remain intact, to be passed on to the next generation, additional consideration must be given to the issue of liquidity.

How do you liquidate estate assets?

The term “liquidity” refers to how easy it is to convert assets to cash. The most liquid asset is obviously cash, because it can always be used easily and immediately.  There are some types of assets that can be easily converted into cash.  These include savings accounts, life insurance proceeds, and stocks and bonds. Certificates of deposit are not quite as liquid, because there is usually a penalty for converting them to cash before their maturity date. In some cases, heirs may be required to sell assets, such as homes and businesses, to meet the taxes and costs.  This is typically the last resort.  Instead, the best thing to do is plan ahead.  This can be done in a number of ways.

Life Insurance Policies

Life insurance policies are an effective way to provide estate liquidity.  Life insurance policies can be purchased as part of an estate plan, for the sole purpose of covering the claims of creditors, as well as the taxes and other costs. With appropriate planning, life insurance proceeds can also be used to cover federal estate taxes.  There are advantages to this method of estate planning.  First, the proceeds from the insurance policy will be available quickly.  Also, these proceeds are not subject to federal income tax.  Another important benefit is the fact that the death costs can be funded for cents on the dollar, since the policy death proceeds are usually more than the premiums that were actually paid.
If you have questions regarding estate liquidity, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.

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