Your estate assets are usually at the center of your comprehensive estate plan. While you may be focused on amassing as many assets as possible, you could be overlooking another important aspect of estate planning. Making sure that your estate includes sufficient liquidity can be as important as the overall value of your estate assets. The Bellevue estate planning attorneys at Legacy Estate Planning, LLC explain liquidity and why it is an important aspect of estate planning.
Estate Planning Goals
Protecting estate assets as well as providing for loved ones in the event of death or incapacity are common estate planning goals. If you have a spouse and/or children, for example, you likely want to make sure that you leave enough assets behind that they do not suffer financially when you are gone. Simply stockpiling assets, however, will not be sufficient to achieve this goal if you fail to consider the impact estate liquidity can have on your overall plan.
The Problem with Probate
If your estate lacks liquidity it won’t become apparent until it comes time to probate your estate, after you are gone. 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. Assets stuck in probate, therefore, are not available to the intended beneficiaries.
What Is “Estate Liquidity?”
A liquid asset is one that can quickly and 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 you can convert the asset’s value into cash. Your home, for example, is not a very liquid asset because it typically takes months to turn the value of real property into cash. Most people have a mix of liquid and non-liquid assets within their estate assets. For estate planning purposes, however, it is important to understand your estate’s liquidity because it will impact the probate of your estate and may adversely impact your loved ones after you are gone.
Taxes are one aspect of probate that can be directly affected by an estate’s liquidity. Every estate is potentially subject to federal and/or state gift and estate taxes. If your estate does incur a gift and estate tax obligation, that tax debt must be paid before any estate assets can be distributed to the intended beneficiaries of the estate. If you fail to ensure 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.
One of the most important reasons to consider your estate’s liquidity, however, can be found in how probate works if one of your goals is to provide for loved ones in your absence. Estate assets are divided into probate and non-probate assets. As the name implies, probate assets are required to go through the probate process before they are available to the intended beneficiaries. Non-probate assets, on the other hand, bypass the probate of your estate and may be immediately distributed to the intended beneficiaries shortly after your death. If one of your estate planning goals is to provide for a family in the event of your death, it is crucial that you include sufficient liquid, non-probate assets in your estate to accomplish this goal. Proceeds of a life insurance policy, for example, are non-probate assets and can be distributed immediately after your death. Cash held in a trust is also a non-probate asset, meaning it can be distributed to your loved ones right away.
Contact Bellevue Estate Planning Attorneys
If you have additional questions or concerns regarding the need for liquidity within your estate plan, contact the experienced Bellevue estate planning attorneys at Legacy Estate Planning, LLC by calling (425) 455-6788 to schedule an appointment.