A well-drafted estate plan will accomplish a wide range of estate planning goals that go beyond just deciding how your estate assets are to be distributed after you are gone. Protecting those assets while you are alive and ensuring that they are immediately available to provide for loved ones when you are gone, for example, are of equal importance. One thing people frequently fail to consider when creating an estate plan is the need for liquid assets within their plan. To help ensure that you do not make that mistake, the probate attorneys at Nash, Nash, Bean & Ford, LLP explain the need for estate liquidity.
What Is “Estate Liquidity?”
If one of your primary estate planning goals is to provide for your loved ones when you are gone, you undoubtedly believe that the more assets you have stockpiled toward this goal, the better. Stockpiling assets, however, may not be enough if those assets are not liquid assets. Liquidity is a term used when referring to the value of an asset. In fact, you may have heard people refer to “liquid assets” before in conversation. 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.
Why Is Estate Liquidity Important?
It is important to know the value of your liquid assets and factor that knowledge you’re your estate plan for several reasons. Your estate will likely have to go through the probate process. Probate is the legal process that is required following an individual’s death. One of the many goals of the probate process is to identify and value all the decedent’s estate assets. Although those assets are eventually distributed to the intended beneficiaries of the estate, that only happens at the end of the probate process. Probating even a relatively simple estate can take months – even years if the estate becomes involved in litigation. While probate is ongoing, the probate assets are unavailable to the intended beneficiaries. If your plan was to leave a large sum of money for your spouse in a bank account, for example, so that he or she could pay the household bills in your absence, that plan won’t work if the assets are stuck in the probate process and unavailable to your spouse.
Another reason your estate’s liquidity matters relates to creditors of your estate, including Uncle Sam. During the probate of your estate, creditors will have the opportunity to file claims against the estate. Approved claims are paid out of estate assets. If insufficient liquid assets are available, your Executor will have no choice but to sell assets to create the necessary liquidity. The same applies to any federal (or state) gift and estate tax obligation your estate incurs. That tax debt must be paid before any estate assets can be distributed to the intended beneficiaries of the estate. If you fail to plan ahead by ensuring that your estate has sufficient liquid assets on hand to cover the tax debt, your Executor will be forced to sell non-liquid assets to satisfy the tax obligation. That could result in the need to sell your family home or other family heirlooms that you never intended to be sold.
Non-Probate vs. Probate Assets
Not all assets are required to go through the probate process. Assets that bypass the probate of your estate are available to pass down to the intended beneficiaries shortly after your death. If your spouse, for example, will need immediate access to funds to support herself/himself and your children, you need to make sure your estate includes non-probate assets. Those non-probate assets will also need to be liquid assets if you wish your spouse to benefit from the value of the asset immediately. Proceeds of a life insurance policy are an excellent example of a non-probate liquid asset. Life insurance proceeds do not go through the probate process and they can be converted to cash virtually immediately. Assets held in a trust also bypass the probate process; however, unless that trust dictates that the assets are to be distributed to beneficiaries immediately after your death, they don’t qualify as liquid assets. The best way to ensure that your estate includes sufficient liquid assets is to consult with an experienced probate attorney.
Contact Probate Attorneys
For additional information, please join us for an upcoming FREE seminar. If you have questions or concerns regarding estate liquidity, contact the experienced probate attorneys at Nash, Nash, Bean & Ford, LLP by calling 309-944-2188 to schedule your appointment today.