Why Is Liquidity Important in Your Estate Plan?

Your estate assets often form the core of your comprehensive estate plan. While you may be concentrating on accumulating assets, you might be neglecting another crucial aspect of estate planning. Ensuring sufficient liquidity in your estate is every bit as important as amassing assets to be passed down to loved ones. To help you better understand, the Indianapolis attorneys at Frank & Kraft explain why liquidity is important in your estate plan.

Estate Planning Goals

Common estate planning goals include protecting assets and providing for loved ones in the event of death or incapacity. If you have a spouse or children, you likely want to leave enough assets to prevent them from facing financial hardship when you are gone. Simply accumulating assets, however, is not enough if you fail to consider the impact of estate liquidity on your overall plan.

Understanding Probate

The lack of liquidity in your estate often becomes apparent during probate. Probate serves to identify and secure assets owned by the deceased, eventually distributing any remaining assets to beneficiaries or heirs. Assets stuck in probate are not available to the intended beneficiaries, which can cause significant delays. This process can be frustrating for your loved ones, who may need immediate access to funds for living expenses, debts, or other financial obligations.

What Is “Estate Liquidity?”

A liquid asset is one that can be quickly and easily converted into cash. Cash in checking or savings accounts is an example of a liquid asset. Other assets have varying degrees of liquidity. For instance, your home is not very liquid because it typically takes months to sell real property. Investments such as stocks and bonds are more liquid than real estate but less so than cash. It is essential to understand your estate’s liquidity for estate planning purposes, as it affects probate and may impact your loved ones after your death.

The Impact of Taxes on Estate Liquidity

Taxes can significantly impact an estate’s liquidity during probate. Every estate is potentially subject to federal and/or state gift and estate taxes. These taxes must be paid before distributing any estate assets to beneficiaries. If your estate lacks sufficient liquid assets to cover the tax debt, your Executor may need to sell non-liquid assets, such as your family home or other valuable items, to satisfy the obligation. This situation can lead to the forced sale of assets you intended to pass on to your heirs, potentially at unfavorable prices due to time constraints.

Why Is Estate Liquidity Important?

Considering your estate’s liquidity is vital if your goal is to provide for loved ones after your death. Estate assets are divided into probate and non-probate assets. Probate assets must go through the probate process, while non-probate assets can be distributed immediately to beneficiaries. To ensure your family is cared for, include sufficient liquid, non-probate assets in your estate. For example, life insurance proceeds are non-probate assets and can be distributed immediately after your death. Similarly, cash held in a trust is a non-probate asset, allowing for quick distribution to your loved ones.

Strategies for Ensuring Liquidity in Your Estate Plan

There are several strategies you can employ to ensure your estate has sufficient liquidity. One effective approach is to invest in life insurance. Life insurance policies provide a payout to your beneficiaries upon your death, offering immediate funds that bypass the probate process. Another strategy is to establish a revocable living trust. By transferring assets into the trust, you can ensure they are managed and distributed according to your wishes without going through probate.

You can also maintain a portion of your estate in liquid investments, such as money market accounts, certificates of deposit, or short-term bonds. These types of investments can be quickly converted to cash when needed. Additionally, keeping an emergency fund in a readily accessible account can provide immediate liquidity for unforeseen expenses or financial obligations.

Given the complexities involved in ensuring adequate estate liquidity, consulting with an experienced estate planning attorney is the best way to develop a comprehensive plan that ensures sufficient estate liquidity.

Do You Have Additional Questions about Liquidity in Your Estate Plan?

For more information, please join us for an upcoming FREE seminar. If you have additional questions about estate liquidity, contact an experienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.

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