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How a Lack of Liquidity Affects Estate Planning

Estate planning is an essential step in preparing for the future of you and your loved ones. Having a plan in place allows you to choose how you want your assets distributed to friends and family when you’re no longer around.

Estate planning helps you plan for future financial, medical, and other personal needs. So having the right plan in place prevents unwanted issues that can often lead to confusion and conflict.

Liquidity is an essential component to estate planning. But it’s also one that’s commonly overlooked by many individuals. Understanding liquidity as it relates to your estate plan helps you cover potential costs and protect the wellbeing of your entire family.

Understanding Liquidity in Estate Planning

Liquidity consists of your ability to convert existing assets into cash as quickly as possible. Common forms of liquid assets include cash, credit accounts, life insurance policies, and the sale of personal property.

It’s important to realize that there’s much more to estate planning than the allocation and distribution of assets. Looking beyond estate taxes and other factors helps you determine how much liquidity you need in your plan.

Liquidity allows you to plan for future costs, taxes, and other liabilities that can arise. Planning in advance protects your loved ones from these expenses and ensures that you get the most out of your estate planning.

Why Liquidity Matters in Estate Planning

There are many issues that must be considered when planning liquidity in your estate plan. Estate tax laws vary between states, so you should make sure that you understand what estate taxes may be applied to your assets upon your death.

Inheritance taxes may also be applied along with probate costs relate to legal fees that are due to courts and attorneys. Avoiding these costs as much as possible is the first step to minimizing your financial liabilities.

But having liquid assets that are allocated in advance guarantees that your family will be free from having to meet these obligations.

Medical care costs can be unpredictable, and Medicare and other providers may not grant the full coverage needed to offset these expenses.

Funeral costs can reach tens of thousands of dollars. This is a significant expense and should be planned for ahead of time so that your loved ones don’t have to cover the cost.

The following are additional liabilities that liquidity can address:

  • Executor fees
  • Cash distribution to heirs
  • Income and capital gains taxes
  • Outstanding loan debt

A skilled estate planning attorney can analyze your unique needs to determine how much liquidity you should include in your estate plan.

Putting Your Liquidity Plan in Place

There are numerous strategies that can be put in place to provide the necessary liquidity for estate taxes and other liabilities. Your estate planning attorney will provide you with the best options to help you plan accordingly and prevent unwanted issues.

You can designate your estate as a beneficiary of your life insurance policy, which provides you with the liquid assets you’ll need. Also, you can realize existing assets now as a way to free up cash to address any existing or future liabilities.

Consulting with your estate planning attorney lets you perform a comprehensive evaluation of your existing liquidity. This prevents you from creating financial issues for your loved ones while giving you peace of mind in knowing that all financial obligations will be met.

Selling off business or property interests can be an option that provides you with the liquidity you need. Discussing these issues with your heirs prevents the confusion that often arises when liquidity isn’t planned for in estates.

Making these decisions now protects your future. Knowing the importance of liquidity and the strategies that help you create an effective estate plan sets the foundation for the financial wellbeing of your entire family.


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