The main goal of any estate plan is to provide for your loved ones, both financially and emotionally, after you die. However, if your estate does not have enough money, or liquidity, your family may be left with much less than you planned. Appropriate estate planning can help reduce the stress and financial burden on those who survive you, but only if sufficient financial resources are available to cover estate settlement costs and taxes.
Why is estate liquidity important?
When someone passes away, there are estate taxes, debts and expenses that must be paid within a short period of time. These expenses include funeral costs, medical bills, unpaid debts, the cost of probate and federal estate taxes. If your estate plan provides sufficient cash to cover these expenses, your family will not be left wondering how to meet these costs. If your estate consists of mostly real estate, you may not have adequate liquidity to cover these expenditures. Proper estate planning is the answer.
If you are wondering what happens if your estate does not have enough money, consider this: If you have substantial debts or estate taxes that need to be paid, the executor may be forced to sell your assets in order to liquidate them, or reduce them to cash. If this is required, it will likely have an enormous effect on the amount of inheritance your heirs will actually receive. If you have a family business, the impact can be even more damaging, when it is your intent to keep the business intact and pass it down to the next generation.
How can I plan to liquidate my assets?
The term “liquidity” simply means how easy it is to convert your assets into cash. Cash is the most liquid asset, as it can be used easily and immediately. There are assets that can easily be converted into cash, like savings accounts, stocks and bonds, and life insurance proceeds. Certificates of deposit (or CDs) are not considered as liquid, because there is typically a penalty assessed when you convert them to cash before their maturity date. In some situations, heirs or beneficiaries may be compelled to sell homes or businesses, in order to pay the taxes and costs owed by the estate. Selling these assets should be the last resort. In order to avoid this situation, it is imperative that you plan ahead.
Life Insurance Policies can be used to provide liquidity
Life insurance policies can be the most effective way to provide sufficient liquidity for your estate. You can purchase life insurance policies, as part of an estate plan, solely for the purpose of paying creditors’ claims, as well as expenses. Life insurance proceeds can also be used to pay federal estate taxes. An advantage of using life insurance proceeds to pay these costs is that the proceeds are available immediately. Also, life insurance proceeds are not subject to federal income tax.
If you have questions regarding estate liquidity, or any other estate planning needs, please contact Sexton, Bailey Attorneys, PA online or by calling us at (479) 443-0062.