One of the things people often forget to consider when creating an estate plan is the need for liquidity within the plan. Without sufficient liquid assets in your estate, your remaining assets could be at risk. The estate planning lawyers at Nash Bean Ford & Brown, LLP explain what could happen to your estate if it lacks sufficient liquid assets to pay all debts.
What Happens after Your Death?
The issue of insufficient estate liquidity won’t become apparent until after you are gone during the probate of your estate. Probate is the legal process that will follow your death. Probate serves several purposes, starting with identifying and securing assets owned by the decedent. Eventually, any assets remaining at the end of probate will be transferred to the intended beneficiaries and/or heirs of the estate. Probate also serves to authenticate the decedent’s Last Will and Testament, if one was left behind, as well as provide a forum for challenging the validity of that Will. Finally, probate allows creditors of the estate to file claims against the estate and ensures that all state and federal gift and estate taxes are paid.
What Is “Estate Liquidity?”
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.
Claims, Taxes and the Need for Liquidity
Shortly after probate is opened, 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 likely unpopular, decisions.
Keep in mind that the law imposes an order of priority that dictates what claims and expenses must be paid first 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.
To avoid putting your Executor and your loved ones through such an ordeal, make sure you are aware of the need for liquidity when you are creating and/or updating your estate plan. In addition, use your Will or a Letter of Instruction to provide your Executor with guidance just in case the need to sell assets does arise despite your best efforts to prevent it.
Contact Estate Planning Lawyers
For additional information, please join us for an upcoming FREE seminar. If you have additional questions about ensuring that your estate includes sufficient liquidity, contact the experienced estate planning lawyers at Nash Bean Ford & Brown, LLP by calling 309-944-2188 to schedule your appointment today.