How to Add Liquidity to Your Estate Plan

January 7, 2022

Estate planning attorneys advise clients to keep plenty of liquid assets available because you may be surprised by the cost of dying or becoming disabled. Liquid assets refer to assets like cash, funds in bank accounts, publicly traded stocks and bonds. On the contrary, illiquid assets refer to real estate, equipment, collectibles and privately held stock. Liquid assets can quickly be converted to cash for the purpose of paying expenses that arise immediately after death.

Some of those immediately due expenses include:

- Bills resulting from your last illness

- Funeral and burial expenses

- Executor’s fees

- Attorney’s fees

- Probate court costs

- Settling outstanding debts, and

- Taxes.

Estate liquidity refers to the ability of your estate to pay the above listed expenses without the need to sell assets quickly (and often for less than market value) to meet the due date for these expenses. Business owners and entrepreneurs need to be especially vigilant about keeping liquidity for estate administration purposes. Business succession plans often address ways to handle business debts, transfer of ownership and continuity issues.

What are some ways to add liquidity to your estate?

1. The most popular strategy is to buy life insurance. It is very important for tax and estate planning purposes to consult a knowledgeable estate planning attorney about the purchase of life insurance. An evaluation will need to be done to determine how much you need, the type of policy, whether you need a life insurance trust and who should be named as the beneficiaries.

2. Purchase a survivor annuity. Joint and survivor annuities continue beyond your death and may either provide a lump-sum payment at death or period-certain installment payments to the survivor named on the account. The survivor can use this money to pay expenses incurred by your estate if directed to do so in your will. Take note that if you make your estate the beneficiary, then the entire value of the remaining payments must be included in your gross estate for estate tax purposes.

3. Designate retirement benefits to your estate. If you choose to direct your remaining retirement benefits to your estate for liquidity purposes, keep in mind that they may be subject to income taxes which will decrease their net value. You will also want to make sure your tax payment and debt payment clauses in your will and trust are worded carefully to explain this strategy.

4. Redeem stock. The IRS allows a corporation to distribute cash needed by a stockholder to pay for estate administration costs and taxes. The redemption of the stock is treated as a capital transaction and your estate will not be subject to ordinary income taxes on the entire distribution as it would be for distribution of dividends. There are certain requirements that must be met to qualify for this tax treatment.

5. Business owners can commit to a buy-sell agreement. A buy-sell agreement is a contract that provides for the sale of the business. The buyer is legally obligated to buy your business interests and your estate is legally obligated to sell those interests. This transaction provides liquidity to the estate; however, many factors need to be considered and a buy-sell agreement should be part of a business succession plan that aligns with your personal estate plan.

As you can see, taking the time to consider your estate’s liquidity can be a huge part of ensuring that your estate plan is carried out in a manner that meets your overall goals. Being able to pay for certain expenses and debts in a timely manner can make a difference in the end result of what your beneficiaries actually inherit. To discuss estate liquidity in more detail, contact the estate planning attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599, emailing us at office@stoufferlegal.com, or register for an upcoming free webinar using the link below:

https://attendee.gotowebinar.com/register/7035069439385130253

https://attendee.gotowebinar.com/register/8300833822350924811

https://attendee.gotowebinar.com/register/3661651217134494219

https://attendee.gotowebinar.com/register/8713086911090907405

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