Making sure that your loved ones can access the assets you leave behind after your death should be an important estate planning goal. To achieve this goal, you must ensure that your estate is comprised of sufficient liquid assets. If you have not considered the need for liquidity within your estate plan before, you are not alone. It is a commonly overlooked aspect of estate planning. To help you avoid making this common mistake, a Los Angeles estate planning attorney at Schomer Law Group, APC explains the importance of liquidity in your estate plan.
What Does “Estate Liquidity” Mean?
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. The value of your estate’s liquid assets is often very important when it comes time to probate your estate.
Why Is Estate Liquidity Important?
Given that the consequences of insufficient liquidity will not be felt until after you are gone, you need to understand now why your estate should include sufficient liquid assets. During the probate of your estate, notice must be given to all creditors of the estate and those creditors must be allowed the opportunity to file claims against the estate. Creditor claims submitted to the court are reviewed by the Executor and approved or denied. Approved claims must then be paid out of the available estate assets. Likewise, any federal (and/or state) gift and estate taxes due must be paid out of the estate assets. If the estate has sufficient cash, either from a financial account or another source, paying those claims is a fairly simple process; however, if the estate lacks sufficient liquid assets to cover all the approved claims and the taxes that are due, the Executor of the estate will be forced to make some tough, and likely unpopular, decisions.
Keep in mind that the law imposes an order of priority that dictates what claims and expenses must be paid first during probate. Taxes, certain expenses, and approved creditor claims must be paid before probate can be wrapped up and the remaining assets distributed to beneficiaries. If the estate lacks the necessary liquid assets to pay those claims and expenses, the Executor must convert non-liquid assets into liquid assets. Typically, that entails selling estate assets to raise the necessary funds. Inevitably, the need to sell estate assets creates controversy because it means selling tangible assets that may have sentimental meaning to the estate’s beneficiaries. All too often an Executor is put in a position where he/she is forced to sell the family home or valuable heirlooms, which is not a desired result for anyone involved. It also increases the likelihood of conflict that could turn into litigation. If your estate becomes involved in litigation, it will dramatically increase the time it takes for loved ones to receive their intended inheritance and diminish the value of that inheritance because of the cost of litigation.
To avoid putting your Executor and your loved ones through such an ordeal, make sure you are aware of the need for liquidity when you are creating and/or updating your estate plan. Just in case, consider using your Will or a Letter of Instruction to provide your Executor with guidance should the need to sell assets arise despite your efforts to leave behind sufficient liquid assets.
Contact Los Angeles Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about ensuring that your estate plan includes sufficient liquidity, contact the experienced Los Angeles estate planning attorneys at Schomer Law Group APCby calling (310) 337-7696 to schedule an appointment.