Building a Liquidity Plan Into Your Estate

When creating your estate plan, it is important to keep multiple factors in mind, from the values that drive your estate plan, to the individuals and entities that you want as beneficiaries, to the way you want to utilize the estate plan to ensure that your wishes about your health are executed when you are no longer able to do so. Likewise, the need to incorporate tax considerations into an estate plan is widely known, as is the role of charitable giving in estate planning. 

However, there is an additional element to crafting an estate that is not discussed as often as it should be, particularly for high-net-worth individuals, and that is the importance of building a liquidity plan for your illiquid estate. A Naperville, IL estate planning attorney can work with you to build a liquidity plan into your estate.

Why is Liquidity Important for Your Estate Plan?

People do not often think of the need for liquidity in an estate plan, and this makes sense. After all, it is fair to say that the main purpose of estate plans is to safeguard and grow assets for future generations. Yet there are aspects of managing a comprehensive estate plan that require liquidity. 

For example, estates need to pay expenses, especially tax liabilities. If the estate lacks sufficient liquid assets, other valuable assets such as real estate and personal property may have to be sold to satisfy those liabilities. This will affect estate beneficiaries and potentially result in an estate plan that does not align with your original wishes for the disposition and use of those assets. 

If any assets end up in probate proceedings, they may also be tied up there for a time, potentially decreasing assets available for beneficiaries who may need these funds. There are other scenarios that may create a bottleneck for paying beneficiaries, and in these cases it will be helpful to have liquid assets on hand to ensure timely distributions to them. 

It is not possible to know with certainty from the outset when crafting an estate plan all of the expenses that will arise, or when and how many liquid assets will be necessary. Incorporating a liquidity plan into the estate plan is essential to prepare for the expected and unexpected expenses of managing it. 

What Factors Influence Liquidity?

• Liabilities and obligations: The number and amount of liabilities and obligations that an estate has will factor into the liquidity needed. These should be settled in a timely manner to avoid incurring additional liabilities. 
• Tax considerations: Ever-present in estate planning, capital gains, estate, and inheritance taxes can reduce the liquidity available for distribution. This necessitates incorporating tax planning strategies. 
• Assets: Whether an estate incorporates liquid assets (cash, bank accounts, marketable securities) or illiquid types of assets (real estate, business interests, fine art) has a big impact on the estate’s liquidity. 
• Economic factors: The state of the markets and economy can affect the valuation of the estate and influence how liquid it is. In difficult financial times, it may be more challenging to sell off certain illiquid assets to make room for more liquidity. 

What Are Key Liquidity Planning Strategies?

Maintaining Liquid Cash Reserves

Cash is king, goes the saying, and in this case the old adage has some truth to it. While it may not be possible to determine with specificity how many liquid assets the estate will need, incorporating a certain amount of cash reserves into the estate can provide liquidity for covering immediate expenses, distributions and taxes without forcing the estate to sell assets.

Life Insurance and Trusts

Putting life insurance policies into irrevocable life insurance trusts and other types of trusts can be a great way to incorporate liquidity into an estate. If the life insurance policies contain sufficient death benefits, these can be used to fill in any gaps in liquidity. 

Loans

Estates can utilize private family or commercial bank loans and lines of credit to obtain cash as needed to fulfill financial obligations. However, the estate executor should be mindful of ensuring that these loans can be paid back in a timely manner and do not end up burdening the estate or becoming debts that negatively impact it. 

§6166 Deferral

Section 6166 of the U.S. tax code allows individuals to defer payment of estate taxes for estates that include business interests. The deferral allows estate taxes and interest related to the business to be paid over a period of 14 years, minimizing the burden of payment. 

Diversifying Assets

Thoughtfully crafted estate plans should be made up of diverse types of assets for many reasons, such as tax implications, growth, and also liquidity considerations. This minimizes the risk that the estate value will be concentrated in one type of asset, but also ensures that some of those assets are more liquid and therefore more accessible. 

Business Succession Planning 

Likewise, implementing business succession planning into an estate plan provides many benefits, including building up liquidity. For instance, buy-sell agreements can be structured to maximize the potential for liquidity, such as by including stock repurchase clauses allowing the company to purchase shares from an individual or requiring the remaining owners to purchase the shares. 

Implementing Strategies for Tax Savings

Estate planning strategies for tax savings also improve liquidity by minimizing the potential tax expense. These include charitable planning, a section 303 redemption of stock that allows a closely held business to treat capital gains tax as ordinary income taxed at a lower rate, and planning that reduces estate valuation, such as the section 2032a special land use valuation that allows farmland to be included into an estate at a reduced valuation. 

Call a Naperville, IL Estate Planning Attorney 

Attorney Denise Gierach will work with clients to navigate the challenges of building liquidity into your estate plan. At the Gierach Law Firm, the experienced Naperville, IL estate planning attorney works with clients to build a comprehensive estate plan that aims to protect our clients’ wealth and interests from every angle. This includes juggling the complex and multi-faceted considerations involved in building liquidity into an estate plan. Call the law firm at 630-756-1160 for a consultation.