Estate planning often involves combining numerous important goals into one overall plan. The primary goal, of course, of your estate plan should be to ensure that your loved ones are protected and provided for in the event of your death or incapacity. Even the most basic estate plan attempts to accomplish this objective by gifting assets to loved ones in a Last Will and Testament. The best of intentions, however, may fall short of the goal if you estate doesn’t have enough liquidity when the time comes. Therefore, it is important to know if your estate has enough liquidity or if adjustments should be made to your estate plan.
Estate liquidity refers to the immediate availability of an asset’s value. A simple illustration can explain the concept. Imagine that your car ran out of gas on the highway and two motorists stopped to offer assistance. One handed you a $20 bill and the other handed you a check for $20. Which one has more immediate value, or liquidity? The cash of course. Although they both have a value of $20, the cash is a more liquid asset because you can use it immediately while the check must be turned into cash before it can be useful.
When you die, your estate assets will likely have to go through the legal process known as probate. Assets that are included in the probate process are not immediately available to your loved ones. If all, or most, or your assets are required to go through probate then your estate lacks liquidity. You may have a home in which you have $200,000 of equity; however, if it becomes part of the probate process that $200,000 doesn’t do your family or loved ones much good immediately following your death.
The good news is that with careful planning you can create sufficient estate liquidity. The key to creating liquidity is to keep assets out of probate by including probate avoidance strategies in your estate plan. The right type of trust, for example, can provide immediate access to trust assets because not all trusts are part of the probate of your estate. A trust may even provide liquidity in the event of your incapacity if drafted properly. Another common inclusion is life insurance because the proceeds are not included in probate. A very simple way to provide immediate access to cash is to change the designation on financial accounts to “payable on death”, or POD. A POD account allows you to appoint a beneficiary who will automatically become the owner of the account in the event of your death.
If you are concerned about estate liquidity–and it should be a consideration–be sure to discuss your options with your estate planning attorney.
Stephen A. Mendel, Estate Planning Attorney
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