The primary objective of your estate plan may be the creation of a plan for how your estate assets are to be distributed upon your death. While the division of your estate assets is certainly an important objective within your estate plan, simply devising a plan to distribute your assets to loved ones may not be enough to ensure that your loved ones are protected and provided for if something happens to you. For example, have you thought about the impact estate liquidity will have on your overall estate planning goals? To ensure that you understand how it can impact your estate plan, an Annapolis estate planning attorney at Sinclair Prosser Gasior explains 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.
Probate and Your Liquid Assets
One reason it is important to have sufficient estate liquidity within your plan relates to the fact that 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 you need to be aware of your estate’s liquidity is that without sufficient liquid assets in your estate, important assets might have to be sold to cover creditor claims. 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 debt must be paid before any assets can be passed down to loved ones.
The good news is that 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. Therefore, if your spouse will need immediate access to funds to support herself/himself and your children, you can provide those assets by making sure your estate includes non-probate assets; however, they 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 because not only do life insurance proceeds bypass probate, but they are paid out in cash to the beneficiary shortly after the death of the insured.
Contact an Annapolis Estate Planning Attorney
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about estate planning, contact an experienced Annapolis estate planning attorney at Sinclair Prosser Gasior by calling (410) 573-4818 to schedule an appointment.