Liquidity, Estate Planning & Administration

Liquidity, in simple terms, is, “the ease with which an asset, or security, can be converted into ready cash without affecting its market price.”  Liquidity can become a major issue when a person is considering their estate planning and later on when a decedent’s estate is being administered. 

          Let’s discuss the issues.  Why is available cash important?  First, is there sufficient cash to pay the expenses of a probate or trust administration (to settle the decedent’s estate), and to pay the decedent’s debts and taxes.  Second, is there sufficient cash to balance out inheritances, if there are beneficiaries who are to receive equal value from the estate.  Third, is there sufficient cash for the surviving spouse, or another dependent beneficiary, to meet their living expenses and lifestyle, after taking into consideration the beneficiary’s other resources.

          In preparing one’s estate plan, a person should consider how to prepare their estate to address these future issues.  Meeting a financial advisor to discuss liquidity issues in advance may avoid or reduce the liquidity issue after a person’s death.  One approach, often given by financial advisors, is to purchase life insurance, perhaps made payable to one’s living trust as beneficiary.  Naturally, this approach depends on being able to pay the insurance premiums.  Another approach is not to equalize inheritances (usually an issue when one has children) and thus to avoid the associated liquidity issue.  That is, gift specific assets – such as a residence or a business – to certain beneficiaries and do not give equal offsetting cash to the other beneficiaries.  When taking this approach, of course, one should anticipate the possibility of a future estate planning contest by a disgruntled beneficiary who does not receive as much inheritance as another beneficiary.

          Another way for an estate to create liquidity – whether in a probate or a trust administration – is to borrow against the equity its assets and to distribute the asset subject to the debt to a beneficiary.  The receiving beneficiary will usually then refinance the debt.  Such short term loans are so-called “hard money” loans due to the significant loan fees and interest.  The loan fees are usually paid by the estate and the loan interest is paid by the beneficiary who receives the encumbered asset.

          Next, when the estate owns an installment note – such as when the decedent while alive financed sale of a residence  – the estate may sell its rights to receive future income payments under installment note.  The sale of rights to income from an installment note, of course, is made at a discounted price. 

          Liquidity may also exist outside of the estate.  Certain (often valuable) liquid assets – such as retirement accounts and insurance — are distributed without any administration to designated death beneficiaries who file claims for death benefits.  The value the death beneficiary in receiving these assets are usually considered when the owner decides how to distribute the rest of his or her assets under a will or a trust. 

For example, a person may name their surviving spouse as a primary or sole beneficiary on some or all of their retirement accounts and insurance policies and give the surviving spouse a right to live in the house, but leave everything else in their trust to the children. 

The foregoing is neither legal nor financial advice.  Anyone confronting the issues addressed should consult with an attorney and/or financial advisor, as relevant. Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.