DOES YOUR
ESTATE PLAN PROVIDE ENOUGH
LIQUIDITY? If Your Primary Estate Planning Objective Is to Provide for Loved Ones in the Event of Your Death Or Incapacity You Must Make Sure Your Plan Provides Enough Liquid Assets to Fulfill that Objective
NASH NASH BEAN & FORD, LLP ILLINOIS ESTATE PLANNING ATTORNEYS
If you have a comprehensive estate plan in place you are ahead of the majority of Americans. Despite knowing how important estate planning is, more than half of all Americans do not have a plan in place. Whether you already have a plan in place, or have yet to create your plan, there is a facet to estate planning that you may not have considered –estate liquidity. If your primary estate planning objective is to provide for loved ones in the event of your
Liquidity refers to the immediate value of an asset. Cash, for example, is the most liquid of all assets because its full value is always immediately available to the owner of the asset.
death or incapacity you must make sure your plan provides enough liquid assets to fulfill that objective. Without sufficient liquidity, your loved ones will be faced with financial hardship at a time when they are already going through the trauma of your loss.
WHY IS ESTATE LIQUIDITY IMPORTANT? To understand why estate liquidity is so important you must first understand what the term refers to in the context of your estate plan. You are likely familiar with the concept of liquidity even if you don’t refer to it by that name. Liquidity refers to the immediate value of an asset. Cash, for
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example, is the most liquid of all assets because its full value is always immediately available to the owner of the asset. Other assets, however, do not offer the same benefit. Take your home for example. Let’s assume that you have $50,000 worth of equity in the property. That $50,000 is an asset of yours; however, it is not a liquid asset because you cannot benefit from the value of the asset immediately. There are steps you would have to take in order to turn the asset into a useable liquid asset.
THE CONSEQUENCES OF INSUFFICIENT LIQUIDITY Now that you understand what estate liquidity is, let’s discuss why it is important. When you die, your estate will likely be required to go through the legal process known as probate. During probate your estate assets are located, inventoried, and valued. Creditors are also offered the opportunity to file claims against the estate and interested parties may even file a challenge to the estate. Eventually, your estate assets will be transferred to the intended beneficiaries once the court is satisfied that the probate purposes have been fulfilled. During this time, which can extend to months or years, your probate assets are held up by the court. Until the court authorizes the release of assets your intended beneficiaries cannot benefit from those assets. A $500,000 investment account does not do your spouse/parent/child any good if he or she cannot access the account. If you have failed to provide liquidity in your estate plan this can leave your loved ones without sufficient assets to pay the bills, maintain a home, or even pay for your funeral and burial.
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HOW YOUR ESTATE PLAN CAN CREATE LIQUIDITY The good news is that you can prevent leaving your family members and loved ones stranded by planning ahead and including sufficient liquidity in your estate plan. The key to providing liquidity is to ensure that your plan includes assets that are not included in the probate of your estate. As with all other estate planning issues, the exact strategies and tools you decide to include may vary; however, there are some common methods of creating estate liquidity, including: Pre-Planning Your Funeral – although it may seem a bit strange to do so, pre-planning your own funeral and burial can be a wise decision for many reasons. From a personal standpoint, planning the service yourself ensures that your wishes will be carried out. If you arrange for payment of the service and burial you also take a significant load off of your loved ones at an already emotional time. While there are many ways to accomplish pre-planning and prepaying, one option is to create a funeral trust. Once created, the trust is then funded with the proceeds of a life insurance policy naming the trust as the beneficiary. When you die, the proceeds are paid into the trust and the trust pays for the funeral and burial. All of this bypasses the probate process. Trusts – trusts have gained in popularity over the last several decades as a result of the many benefits a trust offers. The assets held by certain types of trusts are not included in the probate of your
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estate. Therefore, the trust can disburse some, or all, of the trust assets as soon after your death as directed by the trust terms. In addition, you have the option to name a loved one as the trustee, or successor trustee, providing even more access to trust funds. Life Insurance – life insurance has long been used to provide estate liquidity because the proceeds of most life insurance policies are not required to pass through probate. Instead, they are paid out directly to the named beneficiary. Co-Ownership – by creating the right type of co-ownership you can at least speed up the liquidity process. Let’s take the home mentioned earlier. If the home is in your name alone it will need to pass through probate first and then the beneficiary would have to complete the steps necessary to sell the home (or borrow against the equity) to gain a useable liquid asset. If, however, you create a coownership situation and use the proper title, your interest in the property will automatically pass to the co-owner upon your death. This avoids the need for the property to pass through probate at least. Be careful, however, because in Illinois you must use the proper language in the deed if you wish to create this type of coownership. POD and TOD Designation – bank accounts, financial accounts, securities, and even vehicles in some states can include a “payable on death” or “transfer on death” (POD or TOD) designation. Designating an account or asset as POD or TOD does not create a
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co-ownership situation. Instead, it automatically transfers the account assets to the named beneficiary when you die, thereby avoiding the need for the funds or asset to be included in the probate process. By now is should be clear why including estate liquidity in your overall estate plan is important. By working with your estate planning attorney you should be able to incorporate several of these liquidity strategies and tools into your estate plan to ensure that your family members and loved ones have access to the funds they will need in the event of your death.
REFERENCES The Chicago Bar Association, Joint Tenancy Bankrate, The Pros and Cons of a Funeral Trust LifeHealthPro, Why You Should Keep an Eye on Estate Liquidity
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About Nash Nash Bean & Ford, LLP Dedicated to providing you with quality estate planning resources, we strive to arm you with the information you need to make an informed decision about your family's future. If you have a well-drafted estate plan in place, you'll ensure that your estate passes to whom you want, when you want, and is carried out in the manner you've chosen. Rest assured that your family won't have to endure the public process and costly matter of probate. Call us for guidance on putting a solid estate plan in place.. Nash Nash Bean & Ford, LLP www.nashbeanford.com Geneseo 445 US Highway 6 East Geneseo, IL 61254 Phone: (309) 944-2188 944-3960 Does Your EstateFax: Plan(309) Provide Enough Liquidity?
Moline 5030 38th Avenue, Suite 2 Moline, IL 61265 Phone: (309) 762-9368 Fax: (309)www.nashbeanford.com 944-3960
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