When most people think about estate planning, the question of liquidity is not usually at the forefront of their minds. In fact, many individuals never stop to consider whether their estate will have enough liquidity to meet expenses after they are gone. Unfortunately, failing to think about liquidity can be problematic and can significantly impact your loved ones. To help ensure that your estate is prepared, the Vero Beach attorneys at Kulas Crawford & Smith discuss why ensuring sufficient liquidity within your estate plan is an essential part of planning for the future.
What Happens After Death?
Confronting one’s own mortality is never pleasant, yet it is a necessary part of the estate planning process. One of the issues that should arise during the estate planning process is whether an estate has enough liquidity to cover obligations that must be met once probate begins. Probate is the formal legal proceeding required to settle an estate. Through probate, assets are identified, debts are paid, and the remainder is distributed to heirs and beneficiaries. If the estate does not include enough liquid assets, the process can become difficult and create conflict among surviving family members.
Defining Estate Liquidity
Liquidity refers to the ease with which an asset can be converted into cash. Assets such as checking accounts, savings accounts, or money market accounts are considered liquid because the funds can be accessed quickly. By contrast, real estate, family businesses, or collectibles are typically illiquid because they cannot be turned into cash without a lengthy sales process. The overall liquidity of your estate depends on the balance between liquid and non-liquid assets, which in turn affects how easily debts, taxes, and expenses can be handled during probate.
Why Estate Liquidity Matters
One of the first steps in probate involves notifying potential creditors. Creditors are then given the chance to submit claims against the estate. Those claims must be reviewed and either accepted or denied by the Personal Representative of the estate. Accepted claims must be paid from available assets. In addition, federal estate taxes, state taxes (when applicable), and administrative expenses must also be paid before assets can be distributed to heirs.
If the estate includes sufficient cash or other liquid resources, paying these obligations is straightforward. When an estate falls short of having sufficient liquidity, the Personal Representative must liquidate other assets to raise the necessary funds. That often means selling property that beneficiaries had expected to inherit, such as a family residence, jewelry, or sentimental heirlooms. This outcome can generate disappointment, arguments, and in some cases, legal disputes that further delay the settlement of the estate.
The Problem with Selling Assets
When an estate lacks liquidity, the burden of deciding which assets to sell falls on the Personal Representative. Florida law, like the law in other states, requires that certain expenses and debts be satisfied before heirs can receive distributions. This may result in sales that no one in the family wanted. For example, the family vacation home may have to be listed for sale to pay tax obligations. A treasured piece of artwork or a family heirloom may need to be auctioned off to cover creditor claims.
These forced sales create several problems. First, the market may not support a fair value at the time of sale, resulting in less money than anticipated. Second, emotional attachments to property often lead to resentment among beneficiaries, particularly if they were hoping to keep certain items in the family. Finally, disagreements about whether property should be sold can escalate into probate litigation. Litigation not only diminishes the overall value of the estate because of legal fees but also extends the timeline for distribution of remaining assets.
Strategies to Address Liquidity Concerns
The good news is that liquidity issues can often be avoided with proper planning. A Florida estate planning attorney can review the composition of your estate and help you determine whether liquid resources are sufficient. If there appears to be a shortfall, steps can be taken to correct the imbalance. These steps may include life insurance policies designed to provide immediate cash at death, payable-on-death accounts, or creating a trust that includes specific liquidity provisions.
In addition, it is wise to communicate your wishes regarding property that may need to be sold. Although you cannot guarantee that no sales will ever be required, you can make your preferences clear through your Last Will and Testament or a Letter of Instruction. By offering guidance to your Personal Representative, you reduce the likelihood of conflict and help ensure that decisions are made in line with your intentions.
Can We Help You Ensure That Your Estate Plan Has Sufficient Liquidity?
To learn more, please join us for an upcoming FREE seminar. If you would like assistance to ensure that your estate plan has sufficient liquidity, please contact an experienced Vero Beach estate planning attorney at Kulas Crawford & Smith by calling (772) 398-0720 to schedule a consultation.
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